Bank bond investors hoping the blitz of hybrid securities issuance will create bargains on traditional bank bonds already may have missed the opportunity.
The spread, or gap, between bank bond yields and the yields on comparable Treasury securities widened abruptly two weeks ago when a rush of trust-preferred securities hit the market.
Bond analyst Allerton Smith of Donaldson Lufkin & Jenrette said that spreads on 10-year bonds widened five to 10 basis points, while spreads on 30-year plain vanilla bank paper widened to 10 to 15 basis points.
Traders thought that investors would cash in their bonds to pay for the trust-preferred securities, which led to declining bond prices and widening spreads, explained Mr. Smith. However, when investors cashed in their Treasuries instead, bond spreads snapped back in.
Analysts doubt the widening in bank bond spreads will happen again, particularly with issuance of trust-preferred securities remaining strong.
Indeed, Mr. Smith said that he expects 10-year bond spreads to tighten in the beginning of the year.
Bond analyst John Works of J.P. Morgan & Co. also is dubious about any future bargains in the bank bond sector.
"Honestly, I don't think so," he said. "The fundamentals of these banks remain strong and the earnings positive, but spreads in bank bonds should remain pretty tight."
Bank bond analyst Matthew Burnell of Merrill Lynch & Co. argued that the widening spreads on bank bonds during the first week of December was artificial.
"Spreads right now are where they should be," Mr. Burnell said. "There hasn't been any fundamental change in these banks."
He also noted that while spreads on multiregional banks have tightened uniformly since the beginning of December, there has been more variance in the performance of smaller regional banks.
Mr. Burnell said that a full calendar of corporate bond issuance in January could prevent further tightening of spreads, but he doubts there will be any "incredible" widening.
"Banks' earnings will be strong, but I don't think they will surprise us," Mr. Burnell said.
Mr. Works also warns that investors should expect the spread between regular bank bonds and trust-preferred securities - which can be as wide as 40 basis points - to narrow as well.
He said that the trust-preferred securities trade at premium and spreads between the hybrid securities and bank bonds could narrow by as much as 10 to 20 basis points.
On Thursday, Bank of New York issued $300 million of trust-preferreds, yielding 7.97%. The spread was 126 basis points over Treasuries, in line with previous issues by companies with the same credit rating.