Bank bonds are ready to take off, analysts say.

The environment for bonds is "terrific," said Allerton Smith, a bank bond analyst at Donaldson, Lufkin & Jenrette Inc., who predicts spreads will narrow once a supply of new issues tapers off.

In the last month the performance of bank bonds has been stable, an unimpressive feat considering the surge in the stock market.

According to traders, bank bond spreads-the basis-point difference between their yields and those of Treasuries-remain wide compared with their spreads last summer, reflecting the higher price that issuers have to pay investors. Spreads on bank bonds barely budged Monday, when the Dow Jones industrial average closed at 10,000 for the first time.

Most analysts say they expect bond spreads to tighten because they expect first-quarter bank earnings to be good overall and industry consolidation to be strong.

"There are some people talking about negative earnings," said John Otis, a bank bond analyst at Bear, Stearns & Co. "But most banks are likely to put out good earnings numbers. The strength of the earnings is likely to bring bondholders off the sidelines."

The analyst said he expects spreads on Wells Fargo & Co., Chase Manhattan Corp., and BankAmerica Corp. to be lead performers after the reports come out.

Mr. Otis warns that the Dow reaching 10,000 will not necessarily ignite enthusiasm among bond investors. "In fact, it may heighten concerns about an overvalued market," he said.

Bond investors could also be rattled by the possibility of disappointing first-quarter earnings.

First Union Corp. surprised investors in February with an announcement that higher expenses and an accounting change would reduce earnings growth.

"There is still some hesitancy on the part of the bondholder when it comes to investing," said Ethan Heisler, a bank bond analyst at Salomon Smith Barney. "The events of last summer, which hurt bonds substantially, are still in the minds of investors."

Banks have also prepared themselves for the worst, after last year's market turmoil.

"Banks have dressed up for a recession that didn't happen," Mr. Heisler said. "As the corporate lending business improves, bank spreads are likely to follow."

A wave of issuance by industrial companies and some financial institutions also has affected the performance of bank bonds in the last year.

Last week, Citigroup issued $1.5 billion in global bonds and Imperial Bancorp of Los Angeles issued $125 million in subordinated notes. GMAC, the finance arm of General Motors Acceptance Corp., is expected to issue $2 billion in floating notes, and Goldman Sachs Group plans to issue $1 billion in debt.

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