More U.S. institutional investors are putting their dollars into Yankee bank bonds as yields of domestic bank bonds become less attractive.
Bond issuance by foreign banks in U.S. dollars surged to $42.8 billion in 1996, from $12.2 billion in 1995. Analysts said that they expect the rise in these "Yankee bonds" to continue as investors seek higher yields.
Banque Nationale de Paris and Bangkok Bank are expected to come to the market Wednesday with $350 million and $150 million in Yankee bonds, respectively. And Spain's Banco Santander, a frequent issuer, is expected to come to market again shortly, market sources said.
"The domestic market is so tight that investors searching for yield are willing to take bigger risks to gain a little bit more spread on these foreign bonds," said analyst Sang Mi Choe, who covers Yankee bank bonds for Donaldson, Lufkin & Jenrette Securities Corp.
She noted that as of last Friday Citicorp's 10-year bonds were trading 60 basis points above comparable Treasuries, while the 10-year paper of Malayan Bank in Malaysia was trading at a 72 basis point spread.
Ms. Choe said another sign that Yankee bond issuance is about to rise is the growing number of European banks meeting with American investment houses.
Better disclosure from foreign banks has made U.S. investors more comfortable with investing into Yankee bonds, said analyst Katharine Rossow of Chase Securities Inc.
"Five years ago those that invested in non-U.S. bank paper thought buying Canadian paper was pretty racy. Now people from Southeast Asia are placing paper without major difficulty," Ms. Rossow said.
Ms. Rossow noted that five years ago the differential between Yankee bank bond spreads and domestic bank bond spreads could be as high as 25 basis points.
The gap has since dwindled to about 5 basis points. However, Mr. Rossow argued that U.S. bank bond investors are not getting compensated in the differences in their ratings.
"They can pick up higher quality ratings or spreads in the Yankee bond market," she said, adding that in this market, a 5-basis-point differential is meaningful.
Foreign banks also are issuing more Yankee bonds because it gives their names more international recognition, said bank bond analyst Ethan Heisler of Salomon Brothers Inc.
"As the market becomes more globalized, banks around the world know that trading in Yankee bond elevates your status."
Mr. Heisler expects Yankee bond issuance this year to include debt from Europe and Latin America - particularly Chile.