Global meltdown fears among investors Monday generated some of the widest bank bond spreads seen since the industry's dark days at the beginning of the decade.
SunTrust Banks Inc. and Wachovia Corp., noted for their conservative strategies and lack of exposure overseas, were clear market favorites on a bad day overall for bank and other corporate bonds.
"This is worse than the 1987 crash because that was just one day," said one anxious trader. "Then the risk was junk (bonds), but people knew they had junk. Now investors in domestic bank bonds are suffering because of exposure in Latin America, Russia, and Japan."
Bond spreads are the difference between their own yields and those of Treasury securities. Widening spreads mean investors are selling bonds; narrowing spreads indicate bonds are in demand.
In a flight from global risk, investors flocked to Treasuries Monday, and spreads for SunTrust and Wachovia-seen as carefully managed, locally oriented institutions-widened by only 3 basis points. Meanwhile, bond spreads on First Union Corp. and Fleet Financial Group Inc. gapped out as much as 7 basis points.
But the truly dramatic action was among global players. Spreads on Chase Manhattan Corp., Citicorp, and other money-center banks' bonds ballooned by as much as 15 basis points. Bankers Trust Corp.'s paper was extended out as much as 20 basis points.
"Everybody thinks SunTrust and Wachovia are the safest names because they have conservative balance sheets and very conservative track records," said bank bond analyst Katherine Rossow of Chase Securities Inc. "They also do all of their banking domestically."
Moreover, although merger rumors have died down considerably, investors still believe these companies will eventually combine, creating one of the highest-rated U.S. banks, said one trader.
But the strongest quality of both companies is their quiet stability, said the trader. "These are solid companies that don't blow up the next day because of headlines in the paper."
John B. Works, corporate bond strategist at J.P. Morgan Securities Inc., pointed out that the bonds of First Union and those of the new Wells Fargo are also performing better than the rest of the group because of their companies' domestic focus.
"They both have good, strong cores and do not have big trading operations," said Mr. Works. "The recipe for not doing well in the market is having a large international focus."
In general, bonds of regional banking companies have outperformed those of money-centers during the meltdown in the capital markets as investors have steadily upgraded their fixed-income portfolios to banks with strong ratings and good stories.
"I would not describe it as a flight to quality," said Ms. Rossow who remains bullish on some money-center bonds. "It is more a flight away from companies that have exposure to the emerging markets."
The market is working more on "fear than logic," said Ms. Rossow. "We have not seen spreads this wide since 1991, and that was when the U.S. banking system was collapsing and there were serious endemic problems among American banks.
"But the banking system now is in robust condition, with strong asset quality, capital ratios, and has the lowest level of nonperforming assets it has had in a long time," she said.