Bankers often possess an uncanny ability to sniff opportunity, and the bank bond market has smelled especially sweet in the past month.
As bankers seek funds to fuel double-digit loan growth, tighter bond spreads have provided a cheap source.
Bankers Trust New York Corp., Chase Manhattan Corp., and First Union Corp. are among the contributors to a total of more than $2.175 billion in new notes issued by banks in April, said Ethan M. Heisler, a bank bond analyst at Salomon Brothers Inc.
The trend has continued in May, with $450 million in new issuance. "It's been more than a year since we've seen this volume of issuance this close together with such a positive market reception," said Mr. Heisler, who noted the issuance had been slow through the first quarter.
Analysts said bank bonds have tightened to within 5 basis points of the all-time record, and are as narrow as they are likely to get. "Banks are jumping on this opportunity," said Ann Robinson, a fixed-income analyst at Bear, Stearns & Co.
Citicorp is one of the latest to seize the moment, issuing $150 million of 10-year notes on May 1 priced at 67 basis points over comparable Treasuries. That compares quite favorably with the price three years ago, when the money-center bank's 10-year notes traded 385 basis points over Treasuries, said Ms. Robinson.
Fixed-income investors, for their part, do not seem bothered by banks' comparatively tight spreads, and in fact have shown a healthy appetite for most of the new issues.
Positive first-quarter earnings, comfort with the economy, and interest rates have eased many of the concerns investors might have had with bank bonds.
Indeed, analysts said that bond spreads have tightened even though the financial outlook for banks hasn't really changed.
"On a credit fundamental basis there is no reason for spreads to be this tight," said Mr. Heisler. "For the most part this is (driven by) supply and demand and perception."
Until recently, banks have generally been inactive in issuing new bonds, relying on maturing securities accrued between 1990 and 1993 to provide liquidity and fund loan demand.
"It was natural to draw down those securities," said Ms. Robinson. "Now, the balance sheet is back to normal, and banks have to borrow to fund loans."
Analysts expect to see banks market a host of medium-term issues in the coming months.
Bankers also have issued 10-year notes in the last month, often to fund stock repurchases.
"Capital ratios are high, and there is pressure on managers to improve the return on equity," said Ms. Robinson.
The trend of replacing equity with subordinated debt should continue, Mr. Heisler added.
Despite the comparatively lower returns of new bank issues, bank bonds remain popular with investors because they provide a return that is 10 to 15 basis points higher than on industrial bonds.
Some investors have wondered when banks will encounter asset quality and rating problems.
Analysts said they didn't see immediate problems, though they describe the bond market as a seller's market.
"We expect bank asset quality to deteriorate in another 12 to 18 months," said Mr. Heisler.