Bank bond spreads have continued to tighten throughout the first quarter, indicating that investors are no longer wringing their hands over interest rate hikes and Latin American exposure.
"We're not that far away from the tightest" that the spreads have been over the past year, said Jay M. Weintraub, a first vice president of fixed- income research at Merrill Lynch & Co.
By most measures bank bonds are about 5 basis points away from last year's record low spreads over 10-year Treasuries, indicating healthy confidence in the creditworthiness of banks.
As successive economic indicators have allayed worries that the Federal Reserve might have to continue raising rates, bank bonds have continued to look attractive to the market.
"The thing people are focusing in on more than anything else is the fact that the Fed will not increase interest rates," said Ethan M. Heisler, a fixed-income analyst at Salomon Brothers Inc.
Additionally, early indications suggest that some of the banks that the markets feared had problematic Latin American exposure have fared better than expected.
A case in point is J.P. Morgan & Co. The spread on its bonds tightened by about 3 basis points in reaction to Morgan's stronger-than-expected earnings report last week. This represented a recovery from a month in which sometimes wild rumors about Morgan's Latin American exposure had pushed spreads wider - and pushed down its stock price. (See related article above.)
The spreads at Chase Manhattan Corp., another bank that has been the subject of emerging-market concern, had tightened even before its earnings were released on Monday.
Bank stock prices have also suggested that the market might have put its concerns about the emerging-market exposure of several banks behind it.
"If you look at the stocks of Citicorp, Chase, and the Bank of Boston, the market has grown more comfortable with Latin American exposure," said Mr. Weintraub.
Analysts were divided in interpreting bond spreads at the Bank of Boston Corp.
Spreads at the Bank of Boston have tightened considerably in the last quarter, from a high on Jan. 23 of about 120 basis points over 10-year Treasuries to its current level of about 95.
Though some thought Bank of Boston's spreads might continue to tighten a bit, others thought they had come in line with the rest of the bank group.
BBB-rated credits, such as Bank of Boston, tend to trade less actively than A-rated credits because institutional investors are restricted to higher-rated investments.
Latin American exposure, however, is one of a host of market factors that have taken a back seat to interest rates for bank bonds.
Analysts expect that as spreads tighten a bit more, the market may have psychological difficulty bidding the spreads tighter than last year's near- record lows.
Simple supply and demand, however, may narrow the spreads further, since banks have remained somewhat inactive in issuing new debt.
The optimism about rates and Latin American exposure was strong enough to offset concerns about credit quality voiced recently by the Office of the Comptroller of the Currency.
An OCC announcement about potential lending risk normally would unnerve investors, said Salomon's Mr. Heisler. But "the same day of the announcement, spreads actually tightened."
Others discounted Comptroller Eugene Ludwig's comments as saber rattling. "This is not the first time the OCC has voiced concerns about credit quality," said Mr. Weintraub of Merrill Lynch. "If the OCC does look more closely at credit decisions, that could be a positive."