Bank Bonds Leaving Treasuries Behind

Treasury notes and bank bonds have parted company lately.

Even though prices of Treasury securities have fallen in the last two months, bank bond prices have been rising steadily.

Typically, higher interest rates on government bonds means lower prices on corporate bonds. Recently, however, interest in bank securities has apparently been strong enough to drive prices up, despite downward pressure.

Even banks with widely publicized problems - Bank of Boston Corp. and Shawmut National Corp., for examples - have seen their bonds trade up in the last two months.

Attracting New Investors

Banks' strong performance underscores the degree to which investors are taking a rosier view of the banking industry. It also suggests that the banking sector of the corporate bond market is luring new, yield-hungry investors.

"There's still appetite, and people aren't really selling," said William Downes, a vice president at Keefe, Bruyette & Woods.

Long-term interest rates have risen sharply since mid-April. The yield on 10-year Treasury securities has risen from 8%, to 8.28%.

Bonds of Chemical Banking Corp. were changing hands at 97.5 cents on the dollar Monday, an increase of 5.2% over their price in mid-April.

Shawmut National Corp. notes traded as much as 25% over their mid-April price of 47 cents on the dollar in response to reports of merger talks between that bank and Bank of Boston Corp. Shawmut's notes are now trading nearly 15% above April levels.

Sign of Confidence

Higher yields are luring most investors, one bank bond trader said. They are more confident in the outlook for the industry, particularly now that there are signs the recession is ending, and they want to lock in yields that are still much higher than those on many other corporate bonds.

"There's been a general flight to yield," he said.

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