Investors have become a little gun-shy when it comes to buying bank corporate paper since the Federal Reserve chairman, Alan Greenspan, subtly threatened to raise interest rates.
In the past couple of days, the gap between Treasury yields and bank paper has widened by three to five basis points, while industrial corporate spreads have widened only by two.
"There has been a little weakness in the market, particularly with Greenspan hinting at raising rates," said bank bond analyst Michael Leit of Prudential Securities. "Bank corporates have slightly underperformed."
Mr. Leit added that Friday-the day the Labor Department releases its monthly unemployment numbers-could be an important day for bank corporate paper.
"If that number comes in very strong, there could be potentially more widening," said Mr. Leit. "But long-term investors clearly should hang in there."
So far, the hardest-hit among bank issues have been 10-year debentures, say investors and traders.
Newly issued 10-year Treasuries are more expensive than older 10-year Treasuries-by about five basis points-so investors have had to adjust their bond portfolios accordingly, said money manager Michael Buchanan of Conseco Capital Management, which handles $30 billion of bonds.
"Ten-year bank paper trades like a commodity, meaning it's very liquid," said Mr. Buchanan. "If the Treasuries are getting rich, the reaction is to compensate by selling," he said.
Mr. Buchanan added that investors were more likely to find bigger relative yield in seven-year paper.
The jitters among bond investors were further heightened after Western Assets Management Co. sold $1.4 billion of corporates Tuesday. The sale included several large issues of Wells Fargo, Citicorp, and J.P. Morgan trust-preferred securities.
"That bid list was the focus of the market," said one trader who declined to be identified. "Everyone is sitting back."
But others say investors should not be too concerned over widening bank spreads.
"There is no focused effort to liquidate bank paper," said Mark Hemenetz, who runs the division that manages $18 billion of bonds at Bank of New York Co. "The concern is that spreads are very tight; then there is the situation with interest rates. There have been blips before when they widened out a few basis points."
Bank bond analyst Van B. Hesser acknowledged that investors are reacting to the prospect of higher interest rates but said he does not think they should. Banks are well insulated against rising rates, he noted.
"Fundamentally, banks are in outstanding condition," said Mr. Hesser of Goldman, Sachs & Co. "Yes, we have seen a modest weakening after a fairly strong run, but this is a temporary lull."