Magazine article American Banker

Money-Center Bonds, on the Comeback Trail, Get Boost from Analysts

Magazine article American Banker

Money-Center Bonds, on the Comeback Trail, Get Boost from Analysts

Article excerpt

By TANIA PADGETT Last summer, when the turmoil in the international market was in full swing, there was not a bond analyst on Wall Street who would recommend money-center banks.

Banks with sizable exposure to Asia, Russia, and Brazil would sustain severe losses to their earnings, said analysts, who began beating the drum for regional banks.

Meanwhile, spreads-the difference between the yields of corporate bonds and those of Treasuries-yawned wide as investors fled money-center bonds in droves.

"No one was recommending money-centers' bonds back then," said bank bond analyst John E. Otis of Bear, Stearns & Co. "It would have been foolhardy."

Money-centers are no longer the pariah of the sector. Spreads on their bonds have slowly narrowed as some investors have been drawn to bargain- basement prices and attractive yields. Regional bank bonds are still viewed as safe havens by many on the Street, but last week two analysts broke away from Wall Street consensus and began recommending money-center bonds, even though troubles overseas - particularly in Brazil-are far from over.

"The performance of regional banks will continue to be good," Mr. Otis said. "But the real potential lies in money-center bonds."

Regional banks that do not have strong fee-based businesses are expected to suffer some earnings pressure, Mr. Otis said. "They also cannot pass on the reduction in interest rates to depositors, so there is going to be pressure on spreads."

Money-centers, however, have substantially reduced their positions in emerging markets and their expenses, and they are benefiting from improved capital markets, the analyst said.

Some of the bank bonds that Mr. Otis is recommending were among the worse-performing bonds in the bank sector during the market downturn. They include Bankers Trust & Co. …

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