Doubts Linger Despite Rise in Bank Bonds

Bank bonds continued to rally on Tuesday, after improving sharply on news of the proposed merger of Manufacturers Hanover Corp. and Chemical Banking Corp. But the celebrating may be short-lived.

"I think it's a great opportunity to sell," said Noel Delaney, an analyst at Smith Barney, Harris Upham & Co. "People are expecting too much out of this thing."

Although bond prices rose and yields fell, a bullish sign, investors are still worried about asset quality at many banks. Weak second-quarter results could fuel those concerns.

Moreover, trading activity in all bank bonds was light Tuesday, suggesting that any strengthening was not based on widespread demand for bonds.

More Light than Heat

"I think there is more noise than actual buying," said one bank bond trader. "I think most of the stuff is up as far as it is going to get."

Yields on bank bonds fell sharply Monday on news of the merger, with debentures of Manufacturers Hanover and Chemical pacing the rally. Lower yields suggest that investors are demanding less of a "risk premium" in interest on the bonds.

Manufacturers Hanover's 8.5% subordinated notes due in 1999 were offered at a yield of 9.85% Tuesday afternoon, down from 10.7% last Friday. And Chemical's 9.75% subordinated capital notes due in 1999, which were yielding 10.75% Friday, were also offered at 9.85%.

Similarly, bonds of Citicorp rallied Monday, with yields on the 9.75% subordinated capital notes due in 1999 dropping from 10.9% to 10.55%. But Tuesday afternoon, the notes were still trading at Monday's level.

Bonds of other banks did not fare as well. For example, Security Pacific Corp. saw yields on its bonds fall from nearly 11% to 10.65% on Monday. The improvement continued Tuesday, but only until the bank released its second-quarter results. By Tuesday afternoon, disappointed investors had reversed course on the bonds, driving the yield back to 10.65%.

The rally was largely confined to second-tier banks, traders said. Prices on securities of banks such as Bankers Trust New York Corp. and J.P. Morgan & Co. changed less than those on bonds of Chemical, Manufacturers, Security Pacific, and Chase Manhattan Corp. And bonds of weaker banks moved little on news of the New York merger.

"There is not a lot of activity," said one capital markets specialist. "It's not like there are billions being traded."

Meanwhile, Wells Fargo & Co. reported loan losses sharply higher than last year's levels, and Security Pacific's results also concerned investors.

Issuers May Come Forward

Still, the current strength in the market could lure some quick-footed issuers, capital markets specialists said.

"I can't imagine there could be a better time in terms of peoples' perceptions of banks," said Jay Weintraub, a first vice president at Merrill Lynch & Co.

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