Foreign bank bonds have rallied sharply in the U.S. market this year, fueled by the improving economic outlook abroad.

Among the winners: Debt issued by banks from Britain, Scandinavia, Australia, and Italy. And some analysts say these bonds are more attractive than U.S. bank bonds.

Foreign bank bonds still carry higher yields than those of comparably rated U.S. banks. But since the start of the year, the premium that investors require for foreign bonds -- as measured by the amount that the yield exceeds U.S. Treasury securities -- has fallen dramatically.

Improving Economies

Natwest Capital Corp.'s subordinated debt is trading at 60 basis points higher than Treasuries, down from 110 basis points on Jan. 12, according to First Boston Corp.

The nine-year subordinated debt of Australia-based Westpac Banking Corp. has a spread of 97 basis points over Treasuries, down from 190 basis points in mid-January.

Subordinated debt of the Swedish bank Skandinaviska Enskilda Banken is trading at 113 basis points over Treasuries, versus 155 basis points in mid-January.

Some British and Australian bank bonds have rallied because of their improving home economies, which have helped bank asset quality, said John Paulsen, a bond analyst with Kidder Peabody & Co.

Scandinavian bank bond spreads have tightened as the region's economies appear to be stabilizing and as the Swedish and Finnish governments have promised to support their country's banks, said Joseph Taylor, an analyst with Merrill Lynch.

The bullish trading in the secondary market means foreign banks can issue additional debt more cheaply.

Some analysts are recommending that investors swap out of American bank bonds and into some British, Swedish, or Australian banks because the foreign issues have higher yields with comparable or higher credit ratings.

Allerton Smith of First Boston recommends purchasing Westpac's subordinated debt, which is rated A3 by Moody's Investors Service and A by Standard & Poor's, and is offered at a 97-basis-point spread. This is more attractive than the tighter 83-basis-point spread for BankAmerica Corp.'s subordinated debt, which has lower ratings of A3 from Moody's and A minus from Standard & Poor's, he said.

Svenska Handelsbanken's subordinated debt of 2004 is being offered at 108 basis points over Treasuries, which is a much higher yield than for BankAmerica, while the Swedish bank carries slightly lower credit ratings of A3 from Moody's and BBB-plus from Standard & Poor's, said Mr. Smith.

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