Some contrarian analysts are telling investors it's time to jump back into the bank bond market.
The market has clearly overreacted to economic turmoil overseas, they say, creating bargains in bank bonds.
Bank bond traders still remain nervous about bank bond spreads-the basis-point difference between the yields of Treasuries and of corporate bonds-which have widened considerably in the last month on news of economic turmoil in Asia, Russia, and Latin America.
Nevertheless, spreads narrowed slightly Monday, meaning some investors have pushed past the negative headlines in search of cheap securities.
Bank bond analyst Stanley T. August of First Union Capital Markets says more investors should be buying.
Though the spread between bank bonds and Treasuries is the same as it was three years ago, investors perceive more risk in bank bonds because the percentage difference between corporate bonds and 10-year Treasuries is greater now than it was then.
Indeed, 10-year bank bonds today trade at a premium of 119% to Treasuries, up from 115% in 1995.
The extra risk that investors perceive, however, is not there, said Mr. August.
Bank bond spreads gapped out 100 basis points in 1995 because of fears about an overheating economy and doubt that Federal Reserve Chairman Alan Greenspan could cool it down, said Mr. August. Today, bank bond spreads have widened 100 basis points because of the threat of a global recession and the need for the Fed chairman to buoy the economy.
"It is much easier to prop up the economy than cool it down," said Mr. August. The chairman "also already has a track record. He propped up the economy in 1991."
Mr. August added that banks are much stronger and more diversified than ever before, meaning that despite the trouble overseas and its impact on the U.S. economy "banks are likely to earn their way out of it."
Bank bond analyst Ethan Heisler at Salomon Smith Barney also said investors have overreacted with bonds.
Though banks will "remain hostage to the Asian crisis for the immediate future," buying opportunities exist, said Mr. Heisler in a recent report.