Bank stocks surged on Wednesday in response to lower interest rates.
Banks kept pace with the overall stock market, which advanced after the Treasury Department auctioned $11 billion of five-year notes.
The Tresury's successful sale sparked a rally in U.S. government bonds, causing the yield on the 30-year Tresury security to fall to 6.94% from 6.99% on Tuesday.
The Dow Jones industrial average rose 23.53 to 3.540.16.
A Head Start
Bank stocks were led by Chase Manhattan Corp., which had been gaining strongly even before rates started falling.
Chase shares were up $1.375 to $31.625 in briskk trading, after a $1.125 gain the previous day.
The gains broke a monthlong slump for Chase, prompted by its unveiling of plans for a large stock offering.
For other major bank stocks, the big gains came after the rate drop.
First Interstate Bancorp was up $2.50 to $60; Chemical Banking Corp. gained $1.875 to $39.25; J.P. Morgan & Co. was up $1.125 to $67.875, and Bank-America Corp. rose $1 to $45.375.
Other Big Gainers
Also registering strong gains were Mellon Bank Corp., up $2.125 to $55.25; KeyCorp, ahead $1.75 to $40; Norwest Corp., up $1.375 to $51.50; and Signet Banking Corp., up $1 to $22.25.
Regarding Chase's advance, investors were enticed by an attractive 3.8% yield on the stock, well above the average 3% yield offered by other banking issues.
The yield on a stock is its yearly dividend rate expressed as a percentage of its price.
Chase's high yield reflects a generous dividend relative to its depressed stock price, analysts said.
Shares of Chase had fallen sharply since it announced on April 19 that it would raise $750 million of fresh equity. By last Friday, at its lowest closing price of 1993, the stock had fallen 21.7%.
The stock had not joined other banks' shares in recovering from the profit-taking selloff endured by the industry after first-quarter earnings were reported.
"Chase shares had really been beaten down and hadn't caught up with the rest of the [bank stock] group," said Lawrence W. Cohn of PaineWebber Inc. "They were due for something like a catch-up move."
Chase's stock "plummeted on its own merits and was then swept up in a vicious bank stock correction," said Frank R. DeSantis Jr. of Donaldson, Lufkin & Jenrette Securities Corp.
The bank's capital-raising announcement was a part of a major balance sheet restructuring that also involved shedding $2 billion of impaired real estate assets.
But some analysts said the bank was raising too much equity and will still have too many problem real estate loans, leaving uncertainty about its future earnings.
"Normal earnings are so sharply diluted that the stock's upside potential looks no better than the average bank stock," complained Mr DeSantis, who has a "hold" rating on the stock.
Mr. Cohn has also questioned the offering, which the bank said may be used to fund acquisitions. But he has retained a "buy" rating on the stock
Chase has also said it plans to issue another three million shares of common stock in connection with $12.5 million of warrants it will issue as part of a $17.5 million settlement of a shareholder lawsuit.
Thrifts Enjoy Upswing
The big afternoon rally sparked by lower rates was also joined by major thrifts, mortgage bankers, and government-sponsored secondary mortgage market enterprises.
Golden West Financial Corp., the highly regarded thrift based in Oakland, Calif., surged $2.25 to $43; H.F. Ahmanson & Co., Los Angeles, parent of the nation's largest thrift, gained $1.125 cents to $18.75; and Washington Mutual Savings Bank jumped $1 to $30.125.
Countryside Credit Industries, Pasadena, Calif., the nation's largest mortgage banker, gained $1.625 to $29.875, while Greentree Financial, Marlton, N.J., rose $1.875 to $38.50.
Meanwhile, the Federal National Mortgage Association gained $2 to $78 and Federal Home Loan Mortgage Corp. was up $1.875 to $51.