Bank Bonds Rebound Despite Interest Rate Anxiety

Bank bonds rallied Friday morning as investors put fears of a future interest rate increase on hold.

Traders said that yields on 10- and 30-year bank bonds fell by three to four basis points last week as a result of the upswing in the Treasury market.

Yields on bank bonds have fallen across the board, but they are not as low as they were early this year, noted bank bond analyst Joseph J. Labriola of PaineWebber Inc.

Nevertheless, Mr. Labriola noted, investors "have had a much more positive view on the market than they did six weeks ago," when interest rate concerns prompted bondholders to dump their investments.

Mr. Labriola said he expects the tone of the market to remain steady, though investors continue to worry that the Federal Reserve will raise interest rates at its Federal Open Market Committee meeting next week. He also pointed out that a heavy issuance by foreign banks in the U.S. capital markets could cause bank yields to rise again.

Bank bond analyst Eric J. Grubelich of Keefe, Bruyette & Woods Inc. agreed that investor anxiety is still a factor.

But he pointed out that the recent heavy supply of bank paper has enticed more investors off the sidelines.

He pointed out that Mellon Bank's $300 million subordinated debt issue last Tuesday sold fairly quickly and that some remaining issuance from Banc One's $900 million deal two and a half weeks ago also was snapped up last week.

He added that some banks may try to issue soon if fears of an interest rate hike become stronger.

Bank bond analyst Ethan M. Heisler of Salomon Brothers Inc. said the rally in bank corporates is temporary.

"The overall sense that I am getting from clients is that they are full on banks and are not looking to add to positions," said Mr. Heisler. "This rally reflects that investors are buying on weakness."

He added that he expects yields to remain where they are as a result of minimum supply and credit card concerns.

Investors are much more discriminating about bank bonds, said Mr. Heisler. "Six months ago investors would buy a bank with a good story and a low rating; now they are much more selective," he said.

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