Investors are likely to go on a brokerage-debt buying spree because of cheap prices and the prospect of merger mania in the financial sector, one bank bond analyst says.

Like most corporate debt, brokerage bonds have rallied since hitting record lows in October.

But the spreads on brokers' debt-the gap between the yield on their bonds and that of Treasuries-have yet to tighten as much as the spreads on commercial bank debt.

Investors continue to be leery of securities firms because of their volatile earnings stream and the precariousness of many foreign economies.

Many brokers are expected to report fourth-quarter earnings higher than those of the third quarter but as much as 50% below those of a year earlier, analysts said.

But in a time when yields are a strong attraction to investors, brokerage bond spreads are unlikely to remain so wide.

"With domestic money-center and super regional banks trading anywhere from 15 to 30 basis points better than the highest-rated investment banking and securities companies, we recommend that accounts consider selling the likes of Citigroup, BankAmerica Corp., and Chase Manhattan Corp.," said Joseph J. Labriola, head of corporate bond research at PaineWebber Inc., in a recent report.

Brokerage bonds are cheap, the business operations of many firms are strong, and the prospect of consolidation is high, he said.

Though spreads on all financial bonds have widened because of turbulence in the market, there has been substantial improvement in the spreads. Since October, spreads on money-center bonds have tightened as much as 70 basis points, while brokerage bonds have tightened only 40 basis points.

Deutsche Bank's deal to buy Bankers Trust Corp. could touch off a flurry of bank and brokerage unions, Mr. Labriola said.

That merger deal "underscores an improving business environment" and signals the "beginning of megamergers and big-ticket acquisitions," he said.

Lehman is probably the biggest wild card, Mr. Labriola said.

"Unlike many of the other firms, the company's fourth-quarter earnings will fall well short of its third-quarter results," the analyst said.

But bond investors "should focus on Lehman," Mr. Labriola said. "The company has some decent franchise value and is a likely takeover candidate, and the bonds continue to trade cheaply."

Lehman's earnings look especially poor, Mr. Labriola said, because its fiscal third quarter included a strong June and its fourth quarter included a dismal September.

Lehman is expected to report that earnings slid to $72 million in its fourth quarter, down 61% from a year earlier and 52% from this year's third quarter, the analyst said.

Bank bond spreads generally remained firm Thursday, though Brazil's Congress-in a surprise move-struck down a proposal to raise taxes, which would have helped reduce the country's deficit. The action could dampen the country's chances of receiving more aid and consequently rush it toward recession.

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