The spreads on bank bonds have tightened by an average of 10 basis points in the past two weeks, signaling renewed investor confidence in the industry.
"The market has given bank bonds a reprieve from the inexorable interest rate rises from last year," said Ann Robinson, a fixed- income analyst at Bear, Stearns & Co.
She noted that many believe the Federal Reserve is nearly done raising short-term rates. Spreads on bank bonds widened last year, especially in the second half, largely in reaction to the Fed's credit tightening campaign.
Bank securities suffered much more than other corporates in the fourth quarter of 1994, and consequently have looked cheaper at the prospect of rate stabilization.
"Bank bonds got fairly wide relative to industrials," because the market perceives interest rates as a more significant driver of the bank market, said Ms. Robinson. "Once interest rate fears were eased, banks as a group became more attractive."
Other events have also affected in the recent surge in bank bonds.
"The Shawmut-Fleet deal provided some impetus to the market," said Michael Leit, a fixed-income analyst at Prudential Securities.
With bank bonds trading at 20 to 25 basis points higher than industrials and utilities, they have become particularly attractive in a relatively inactive market.
"There's not much product in the whole corporate sector, and banks are cheaper than anything else right now," Mr. Leit said.
"Investors are driven to the bank bond sector because the best buys are out there," said Ethan Heisler, a fixed-income analyst at Salomon Brothers Inc. "The market is not in love with any particular opportunities."
Reflecting the market's uncertainty about the trend in bank bonds, traders are unwilling to swap short-maturity bonds for longer maturities, Mr. Heisler said.
Some major thrifts are now seen as bargains, because they have not experienced the same tightening of spreads as many in the bank sector.
H.F. Ahmanson & Co.'s bonds were yielding 105 basis points more than 10- year Treasuries on Monday, up five points from Jan. 19, indicating its price was that much cheaper relative to the return on investment. Great Western Financial Corp.'s spread rose 2 points to 90 basis points in that same period.
"It's hard to find others that cheap," said Ms. Robinson.
Spreads on most bank bonds have tightened, even those of J.P. Morgan, which were downgraded by Standard & Poor's Rating Group earlier this week and by Moody's Investors Service earlier in the month.
Spreads on Morgan's bonds tightened to approximately 60 on Wednesday, down 10 basis points from Jan. 19, and almost 20 basis points from Dec. 30 of last year.
In fact, since the downgrade by S&P, Morgan's bonds have tightened a few basis points, reflecting the fact that the market had already anticipated the ratings change.
S&P downgraded ratings for the Morgan's holding company because of the volatility and unpredictability of its trading businesses - the same reason Moody's gave.
S&P said the action was unrelated to the failure of Barings PLC over the weekend caused by a $1.2 billion trading loss in its Singapore office.