Magazine article American Banker

Bank Bond Spreads Widen to Highest Level since Fall

Magazine article American Banker

Bank Bond Spreads Widen to Highest Level since Fall

Article excerpt

In line with the sharp drop in bank stock prices, bank bonds are selling at the biggest discount to comparable Treasury issues since the 1998 financial crisis.

Average spreads between yields on 10-year bank bonds and 10-year U.S. Treasuries have widened 20 basis points, to 147, since mid-July, according to a 20-bank index compiled by Keefe, Bruyette & Woods Inc.

The current spread is below the record high of 168.8 last October, when the bond market all but dried up in the wake of Russia's default.

Analysts attribute the widening of the spread to a flood of bank and corporate issues this summer and growing skittishness over prospects of rising interest rates. Investors also want high levels of near-cash assets in case year-2000 computer bugs reduce the financial system's liquidity. Bonds do not fit that bill.

Banks are not alone in facing higher costs of longer-term borrowing; nonbank corporations also are under pressure. Companies fear that investors may be unwilling to buy bonds in the fourth quarter because, like corporations, they may want to be as liquid as possible as 2000 approaches. If no one wants long-term bonds and everyone wants cash, investors holding bonds will not be able to sell them without losing substantial amounts of principal.

Having to prepare for such liquidity problems has caused many corporations to issue more bonds than usual, flooding the market with supply at the same time demand is down.

Everybody is operating under the assumption that you won't be able to issue debt in the fourth quarter, said Thomas Finucane, an analyst at John Hancock Advisors in Boston. If you want to fund into the new year, you want to do that now.

With spreads on all U.S. corporate bonds widening, plus the recent increase in Treasury yields, issuers are facing a double whammy, said Eric Grubelich, an analyst at Keefe. …

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