Bank stocks and bonds were caught in a maelstrom of rumors and speculation Thursday as investors fretted over international currency problems.
The Mexican peso fell to an all-time low against the dollar, putting pressure on the stock of some money-center banks with exposure in Mexico, notably J.P. Morgan & Co.
At the same time, investor uncertainty that reined in bank stocks a few days ago has spread to the bond market, causing a widening in spread over 10-year Treasuries, especially for banks with international trading operations.
"Bank securities never perform well when the dollar is under pressure in any sustained way and there is a negative trend in the dollar. It's definitely been exacerbated over the last week or so," said one fixed- income analyst.
The trading was fueled by rumors concerning Morgan's exposure to Latin American debt and about the possibility of derivatives losses. Its stock fell more than $2 by midday before recovering to close at $62.75, off $1.125.
A J.P. Morgan spokeswoman issued a statement, saying "It is our practice not to comment on our financial performance until we release our quarterly results."
Market sources generally put little credence in the rumors, attributing them to skittishness in the face of the recent slide of the peso and dollar, rogue traders, a flattening yield curve, rising interest rates, and the potential for an economic hard landing.
"Perhaps these rumors say that only the insane people are playing the market today, while the sane people are standing pat," said George Salem, an analyst at Gerard Klauer Mattison.
Mr. Salem pointed out that shares of Citicorp were up 75 cents - closing at $40.75 - and that was "incongruous" with the assumption that Latin American debt was a real factor.
"It is the biggest of all money-center banks in Latin America, relative to their size or in absolute terms," said Mr. Salem.
"It has the classic feel of a bear raid," said Frank R. DeSantis Jr., an analyst at Donaldson, Lufkin & Jenrette. "Someone has probably shorted (J.P. Morgan) stock and spread rumors to benefit."
Similar rumors also contributed to a widening of bank bond spreads over the 10-year Treasury.
The spreads on Citicorp debt were a case in point.
For the first time in almost a year, the spreads on Citicorp bonds were wider than on those of comparably rated BankAmerica bonds. Earlier this week, Citicorp's bonds spread to 83 basis points over the 10-year Treasury, while BankAmerica's slipped to 82.
Analysts said Citicorp usually trades at a lower yield than the comparably rated West Coast bank because BankAmerica typically has more paper on the market. "It's a supply and demand issue," said Ethan Heisler, a fixed-income analyst at Salomon Brothers Inc.
Analysts suggested that bank spreads have generally widened as a result of concerns over a weakening dollar and the potential for higher interest rates, which makes U.S. bonds less attractive to investors who deal in the Japanese yen or German mark.
The market may have pushed Citicorp's bonds wider, say analysts, because of its potential exposure to Latin America.