The lull in investors' concern over the Asian financial crisis has been good for the market in domestic bank bonds.
As investors have snapped them up, spreads on bank corporate bonds have tightened as much as 25 basis points in the last two weeks, said Joseph J. Labriola, head of corporate bond research at PaineWebber Inc.
"The sensitivity over Asia, which was overblown to begin with, has stabilized," he said.
Illustrating the shift, Fleet Financial Corp. issued $120 million of 30- year preferred securities on Jan. 24 at a spread of 118 basis points over comparable Treasury securities.
Amid Asian concerns, the spread widened to at least 123 basis points, but then narrowed. It had tightened to 93 basis points by Friday, traders said.
Beyond less nervousness over Asia right now, bank bond spreads have also tightened because of scarcity value.
As corporate market watchers had anticipated, many industrial companies issued bonds during January because of low rates, Mr. Labriola.
"However, banks have only done deals here and there," he said.
He expects spreads for bank corporates to tighten even more In coming months.
"Earnings momentum may be a tad weaker, but underlying fundamentals for commercial banks are relatively good," said Mr. Labriola.
The rallying Treasury market has also given a boost to bank corporate bonds, noted bank bond analyst Anthony G. Smith of Donaldson, Lufkin & Jenrette.
Portfolio managers and bond investors also have cash that they need to put work, Mr. Smith said.
However, the market atmosphere could change in six to 12 months because of the immense supply of Japanese bank trust-preferred securities expected to flood the U.S. capital markets.
Last week two of Japan's largest banks, Sumitomo Bank Ltd. and Industrial Bank of Japan, or IBJ, issued nearly $3 billion in trust- preferred securities.
They were reportedly well-received by investors. Market observers said more is on the way as Japanese banks scramble to shore up their capital reserves by March 31-the end of their accounting year.
Japanese trust-preferred securities and U.S. bank bonds "move in slightly different orbits," said Mr. Smith. "However at some point the credit curve will be drawn between these two instruments."
That means that some "U.S investors may begin to look at the Japanese securities as a substitute for the U.S. bank bond," he said.
Market observers noted that troubles are still continuing to percolate overseas and that could eventually dampen the rally that bank bonds have been experiencing.
For example, on Friday Moody's Investors Service downgraded the long- term deposits of Daiwa Bank Ltd. to one notch above junk and put several other Japanese banks on negative watch.
"These ratings actions send out a note of caution that the Japanese banks may not be out of the forest in terms of bad debt problems," said Matthew H. Burnell, a bank bond analyst at Merrill Lynch & Co.
"This will certainly heighten investors' concerns."
