With a banking rescue in the offing in Japan, bond analysts are giving table-pounding "buy" recommendations to Japanese banks' securities.
The bonds of choice lately are "step-up perpetual preferred" securities issued out of Fuji Bank Ltd.
These Yankee bonds-or bonds issued by foreign banks into the U.S. capital markets-made their debut this year when Japanese banks were looking for cheap regulatory capital to shore up their depleting coffers.
But three months ago investors watched their investment in the securities turn to dust as asset quality in Japan's top banks began to wither and a recession took hold of the economy.
According to Goldman, Sachs & Co., spreads-the difference between securities' yields and those of Treasuries-widened by as much substantially as investors dumped the securities.
The Fuji bonds are rated BB-plus by Standard & Poor's and ba1 by Moody's Investors Service, yet they trade at CCC levels, bond analysts said.
Such securities issued by Tokai Bank Ltd., Sumitomo Bank Ltd., and Industrial Bank of Japan Ltd. are considered fairly valued, meaning there is little for investors to gain, but Fuji's securities are a different story, market experts said.
Fuji securities received a worse drubbing than the others because the bank was more leveraged, and the securities' ratings were lowered. By August, the spreads on the Fuji securities were as wide as 2,000 basis points over Treasuries.
At the end of October, Japan passed a $492 billion banking system package, which fueled a buying frenzy in Japanese securities. On Wednesday spreads on the securities widened slightly, but market experts still see a trend toward tighter spreads.
"There is room for further improvement" for the Fuji securities, said bank bond analyst Van B. Hesser of Goldman Sachs.
Financial troubles in Japan are far from over, Mr. Hesser said, but "Japan still has the world's largest economy and remains the largest creditor nation in the world. Japan continues to plow substantial resources to fix its banking system. We think investors have not fully recognized this."
Most bank bond analysts are bullish on the securities but warn that there could be potholes in the road ahead.
"Important progress has been made by Japan, and investor confidence has improved" said bank bond analyst Allerton G. Smith of Donaldson, Lufkin & Jenrette Inc. "But there still remains a question about Japan's rate of recovery and a question about Fuji's deeper asset-quality problems."