Spurred by the Citicorp-Travelers Group merger, investors piled into the bonds of Citicorp, other money-center banks, and brokerage firms last week in anticipation of similar mergers.
The spreads on money-center bonds-the basis point difference between Treasury's yields and corporate bonds-tightened by as much as 3 basis points last week, while brokerage firm debt narrowed by as much as 5, traders said.
Market experts said they expect the spreads to continue to narrow as investors speculate about other possible mergers.
The number of investors buying bank and brokerage bonds "may not be huge in upcoming weeks simply because first-quarter earnings are coming out, but investors are well aware that consolidation continues to be part of the banking landscape," said one bank bond trader.
Dennis Adler, a corporate strategist at Salomon Brothers Inc., told investors in a conference call that Salomon "has put a significant overweight on the finance sector" because the Citicorp-Travelers deal is likely to "accelerate the pace and magnitude of consolidation."
Joseph J. Labriola, who heads the corporate bond research department at PaineWebber Inc., offered a similar view.
"We think the likelihood that other large global money-center banking companies will look to acquire, merge, or align themselves with other comparably sized bank and nonbank financial intermediaries looms very high over the next six months," he said.
Potential combinations include American Express & Co. with BankAmerica Corp. or NationsBank Corp., or Chase Manhattan Corp. with Morgan Stanley Dean Witter, Mr. Labriola said.
He added: "Securities companies like Lehman Brothers Inc., Bear, Stearns & Co. and Donaldson Lufkin Jenrette are more likely to be acquired by the non-U.S. banks, such as ABN Amro, Soc. Gen (French bank Societe Generale) and Deutsche Bank."
Bond investors scooped up Citicorp bonds because they also anticipate an upgrade in the company's ratings, market experts said.
Citicorp, whose ratings are AA3 from Moody's Investors Service and A+ from Standard & Poor's, could be boosted to Traveler's Aa3 or AA- rating, market sources said.
"In essence, Citicorp's going to get upgraded because it has become a new entity," said bank bond analyst Stanley T. August of First Union Capital Markets. "And as other banks establish financial conglomerates, higher ratings are in store."
During the Salomon conference call, Mr. Adler said that he expects financial conglomerates with global reach to be upgraded to AA status and to trade as well as top-rated industrial companies.
Investors are also finding the bank and brokerage bond firms more attractive because turmoil in Asia seems to have settled down at least for the time being, said Jack Ablin, executive vice president and head of fixed income at Barnett Capital Advisors Inc.
Korea issued $4 billion in debt Wednesday, which wasfavorably received by bond investors indicating that increasing confidence in the country, Mr. Ablin said.