Analysts See an Upside for Regional Banks' Bonds Because Spread Over

As 2000 approaches, analysts are predicting that bonds of regional banks will perform better than those of multinationals.

Regional bank bonds generally demand lower yields than money-centers' bonds, and that difference is expected to widen.

Markets view banks with heavy exposure in trading and in emerging markets as being riskier than banks that focus on domestic business. That is why yields on money-centers' bonds generally trade at higher premiums to U.S. Treasuries than do the bonds of banks with a domestic focus.

On Friday, the average bid for bonds of 10 regional banks was 142 basis points above comparable U.S. Treasuries, according to data compiled by J.P. Morgan Securities Inc. The average spread for five money-center banks was 149.

Another firm reported that bids for 10-year National City Corp. bonds were 139 basis points above Treasuries, Bank One Corp. 140; First Union Corp. 145, and Fleet Financial Group 147. That compares with Bank of America Corp., at 140, Citigroup Inc. 138; Chase Manhattan Corp. 141; and J.P. Morgan & Co. 149.

That tiny difference is not likely to continue, says Scott O'Donnell, an analyst at J.P. Morgan in New York.

Regionals, he said, offer safer bets based on their credit stability and lack of vulnerability to financial market volatility.

Investors will not want to accept the greater risks of money-center banks for just seven basis points, he said.

If you're thinking of risk factors, the prudent approach would be to favor the home-sweet-home names, said Carl de Jounge, an analyst at Deutsche Bank Securities in New York.

Bids Friday on 10-year regional bonds were trading near money-centers.

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