Financial stocks had a slow trading day Tuesday, and shares of major thrifts fell as investors awaited today's decision by the Federal Open Market Committee on whether to cut interest rates another notch or two.
Even shares of companies that have grabbed headlines for profit shortfalls and loan problems have run up in recent weeks in anticipation of further rate cuts by the Federal Reserve. Shares of Bank of America Corp., for example, rose $1.45, or 2.68%, to $55.47. Low volume kept the American Banker index of top 50 banks flat for most of the trading day, but an afternoon rally put it up 1.1% at the market close. The index of 225 banks rose 0.9%.
Bank of America in Charlotte, N.C., said Tuesday that it has begun to issue $3 billion of unsecured notes with a minimum duration of nine months. James Kelligrew, head of Global High Grade Fixed Income, said the sale, which began Monday, "will provide Bank of America with a new source of ongoing funding, additional flexibility, and increased brand awareness."
Catherine Murray, an analyst at J.P. Morgan Securities, said that the sale should be viewed positively. As interest rates come down, it is normal to see banks issue new bonds, she said.
Ms. Murray pointed out, however, that the sale does not address any of Bank of America's problems, which include a steadily increasing book of nonperforming loans. These have contributed to the company's failure to live up to the expectations of equity analysts in recent months.
Fixed-income analysts tend to have a more positive view of Bank of America, and they said Tuesday that the note sale had attracted little controversy in the bond world.
The company can come to market with a debt issue because it has not reached the crisis level that has shut out some other financial services companies. Finova Group, for example, is facing the prospect of reorganization under the bankruptcy code if it does not succeed in restructuring $4.7 billion of bank debt and $6.6 billion of bonds. Finova suffered another setback last week when Leucadia National Corp. backed out of an agreement to invest $350 million.
Bank of America still has the benefit of the doubt in the debt capital markets.
"We tend to be less concerned," said David H. Spring, an analyst with Fitch Inc. "It is a strong franchise with diversified revenues and has enough resources to buy back their bonds." Mr. Spring rates the company "Aa."
Meanwhile, thrifts declined on profit-taking as investors took a breather from a sector that has run up significantly in the past six months. The American Banker thrift index lost 0.66%.
Fred Price, head of equity research at Sandler O'Neill & Partners, said that as the most interest rate sensitive of financial stocks, thrifts benefited when the Fed stopped raising interest rates last summer. Thrift shares might now drift a little lower, he said.
A 50-basis-point cut would not move thrift stocks much, Mr. Price said, though a more moderate 25-basis-point cut could give investors a buying opportunity. Washington Mutual and Golden West Financial Corp. declined 2.5%, to $49.60, and 2.81%, to $55, respectively.
"The sector takes a pause," Mr. Price said.