Interest rates are still low, but bank bond spreads are likely to widen in coming weeks, according to analysts.
Spreads-the basis-point difference between the yields of Treasuries and of corporate bonds-have held steady as bond investors have grown more confident that an interest rate hike is not on the horizon.
Bond investors, who think higher rates are harmful to banks, sighed with relief after Federal Reserve monetary policymakers decided not to tighten credit.
But Joseph J. Labriola, who heads corporate bond research at PaineWebber Inc. in New York, is not so sure that bank bond spreads are out of the woods.
In a recent report, Mr. Labriola said that "continued weakness in the bank sector is likely to prevail even in the absence of a Fed tightening" at this week's Federal Open Market Committee meeting.
Though bank spreads have tightened this week, that "is likely to be short-lived," Mr. Labriola said.
A strong economy and sky-high stock prices continue to pressure the Federal Reserve to raise rates, he said.
At the same time, political unrest overseas could spook investors just enough to sell bonds, he noted.
Bank bond analyst Allerton G. Smith at Donaldson, Lufkin & Jenrette Securities Corp., New York, said bank bond spreads could widen because of an increase in debt supply.
But in the longer run, spreads are likely to improve, Mr. Smith said. "The fundamental credit picture for U.S. banks is good, and concerns over developments are already factored into the spreads."
He added, "If we continue to see improvement in overall bond yields, then new issues will continue to come to market."
Bank bond analyst Katherine Rossow of Chase Securities Inc., however, doubts that bank bond spreads will change at all.
"Bank bond spreads will stay stable," Ms. Rossow said. Because the Fed did not raise rates this week, people are less worried that rates will rise, he said. "And banks and other financial institutions have already issued quite a bit of debt already."
This week Fleet Financial Group issued $250 million in subordinated debt, while Finova Group Inc., a finance firm in Phoenix, issued $100 million in seven-year notes.
Meanwhile, Standard & Poor's raised its ratings on Mellon Bank Corp. and its subsidiaries on Thursday and removed them from its CreditWatch list. Mellon was placed on the CreditWatch list on April 22. The upgrade affects about $3.5 billion of outstanding long-term debt.
"The ratings upgrade is due to Mellon's success in diversifying its business mix and revenue stream, key factors that have contributed to its ongoing strong financial performance," Standard & Poor's said in a press release.
