Six weeks ago, when J.P. Morgan & Co. came to market with a $1 billion issue of debt, its 10-year bonds were among the worst performers in the banking industry. But more recently investors have been stuffing their portfolios with the bank's paper.
The spread on J.P. Morgan's 10-year bonds-the difference between their yields and the yields on 10-year Treasuries-has tightened as much as 17 basis points in the last three weeks, indicating that investors are warming to the securities.
J.P. Morgan's bonds may not be performing as well as the bonds of industrial companies, but "among money-centers they have been the best performing so far," said John Otis, a bank bond analyst at Bear, Stearns & Co.
In the six-week period, spreads on the 10-year bonds of Chase Manhattan Corp., Citicorp, and BankBoston have improved by only about 10 basis points, traders said.
That wasn't the case in January. In fact, investors balked at buying the bonds and chose to put their capital to work in companies that had less exposure to tumultuous foreign markets and hedge funds.
Now analysts say J.P. Morgan has cut its exposure to emerging markets, built up its capital position, and bolstered its earnings by underwriting more mergers and acquisitions deals and asset-back securities issues.
According to Securities Data Co., J.P. Morgan did $62 billion in mergers and acquisition advisory work in February, up from $19 billion in January. It did $1 billion in asset-backed securities deals, up from $250 million in January.
Investors are also drawn to the securities because of their enticing yields, Mr. Otis said. "J.P. Morgan's bonds trade wider than their credit rating."
Investors also tend to view J.P. Morgan as a brokerage firm, meaning its bonds tend to trade cheaper than the bonds of U.S. commercial banks.
Morgan's $1 billion 10-year issue on Jan. 21 was the biggest subordinated debt offering by a U.S. bank. It came to market at 137.5 basis points over Treasuries, then widened to 140 basis points as investors stayed on the sidelines or sold their bonds quickly.
Investors are not selling now.
"People have become more comfortable with the J.P. Morgan story," said bank bond analyst David Hendler of Credit Suisse First Boston, who reversed his opinion on the bank about six weeks ago. "We like this credit now and believe that there is still a good amount of upside."
Other analysts are still cautious about the securities. "J.P. Morgan's bonds have performed surprisingly well," said bank bond analyst Carl de Jounge of Deutsche Bank. "But I don't see much upside in their bonds.
"I still view J.P. Morgan as a riskier money-center compared to BankAmerica or Chase, because (Morgan has) a more volatile earnings mix," Mr. de Jounge said. "I don't think the bonds will outperform. I think they had their run."