Investors in bank corporate bonds have been selling in recent weeks because of worries that a fresh supply of bank debt coming in the fall could create an oversupply.
The spreads, or gap, between the yields on bank bonds and comparable Treasuries-have widened by 5 to 8 basis points in the last three weeks, traders said.
The widening of spreads in bank debt is more pronounced than for industrial bonds or other financial firms' bonds, noted Joseph J. Labriola, who heads corporate bond research at PaineWebber Inc.
Mr. Labriola said that investors have grown increasingly worried about coming supply, which includes issuance of so-called Yankee bonds-issued by foreign banks in the domestic market-and domestic banks' bonds.
Dealers have been trying to lighten their inventories in anticipation of this, market experts said.
Although some market experts say that most banks have already issued plenty of debt this year, Mr. Labriola predicted a new flurry of issuance by banks that plan to close acquisitions in the year.
Typically "after a number of merger transactions, there has been Tier 2 debt financing," Mr. Labriola said. "Banks typically will go ahead and raise debt in order to buy back stock later in order not to create too much dilution."
Banks expecting to close merger transactions at the end of the year include First Union Corp., which recently announced a deal to buy with Wheat First Butcher & Singer; NationsBank Corp., which is buying Montgomery Securities Inc.; and Wachovia Corp., which has three mergers pending.
The analyst also noted that favorable conditions in the interest rate swap market are likely to encourage bank issuance.
"Favorable swaps spreads enable the lion's share of banks who issue fixed-income products to raise capital cost-effectively," said Mr. Labriola, who expects such conditions to continue.
Meanwhile, spreads on trust-preferred have widened significantly because of its call feature.
Mr. Labriola added that anxiety over increasing interest rates still remains.
"Trust-preferred securities are not in vogue, even though they have cheapened up as a function of market conditions," he said. "Trust-preferred are going to see further pain as the year continues, but they may very well turn out to be the total-return plays of 1998.
"Rates could go higher in 1998," Mr. Labriola said. "It will depend on the economy and growth."