With long-term rates at the lowest level in more than a year, bank are poised for another round of bond offerings, analysts say.
After taking advantage of tightening spreads on their bonds in the first quarter, with several billion dollars of new issuance, banks now see an opportunity as yields drop in concert with the federal funds rate.
"There probably is not a treasurer in a banking company who is not giving serious consideration to raising longer-term money at absolute rates under 8%," said Allerton Smith, a fixed-income analyst at Donaldson, Lufkin & Jenrette.
Some large regional banks have even expressed an interest in maturities as far out as 30 years, said analysts.
The market generally expects new bank issuance across the spectrum of maturities.
Banks need shorter-term issues to fund loan growth, and they will avail themselves of the opportunity to issue longer-term notes while rates are favorable.
"In some areas of the country, deposit wars make it more attractive to access wholesale funding," said Mr. Smith.
While yields have created an ideal wholesale funding environment, however, bank bond spreads - which tightened to spur issuance through the first quarter - have been widening.
Spreads represent the premium over comparable government issues paid to investors in bonds and notes. The tighter the spreads, the lower the cost to the issuer.
"All of a sudden, news started coming out that the so-called soft landing is not as soft as people thought," said Ethan M. Heisler, a fixed- income analyst at Salomon Brothers Inc., referring to a weak May employment rate.
Spreads in the entire corporate market widened last Friday on the assumption that a souring economy could lead to downgrades, said Mr. Heisler. "To the extent that the rest of the corporate markets will widen, the banks will widen in concert," he added.
Since last week, bond spreads at many of the money-centers had widened by an average of 5 basis points.
Citicorp's 10-year bonds were trading in a range of 85 to 80 basis points over Treasuries on Tuesday, compared with 82 to 77 a week ago. Bank of Boston traded 95 to 90 Tuesday, several basis higher than last week's 92-to-87 range.
Low yields more than make up for the higher spreads, said Prudential Securities fixed-income analyst Michael Leit, which may make the current climate attractive for new bank bond issuance.
"With these yield levels, even if spreads are out as much as a dime (10 basis points), banks have to think about issuing," said Mr. Leit.
Bankers' interest in new issuance has clearly increased, with investment banks scrambling to prepare shelf registrations for both senior and subordinated debt.
For investors who don't believe a recession is imminent, wider spreads make bank bonds an attractive buy, analysts said.
And they do not see an investor shortage for bank bonds. "The bank market today is really populated by longer-term investors," said David Hendler, a bond analyst at Smith Barney Inc.
"When spreads get close to 85 to 90 over comparable Treasuries, bank bonds will be attractive to these types of players," he said.
Analysts said that technicals in the banking sector remained strong, indicating that changes in spreads reflect supply and demand more than anything else.
Meanwhile, banks continued seeing opportunity in the European market, as Chemical Banking Corp. issued $200 million of floating-rate notes on Tuesday.
Led by Chemical Investment Bank Ltd., the five-year notes have a coupon of 15 basis points over the three-month London interbank offered rate.
