Investors in bank corporate bonds and trust-preferred securities are becoming more skittish about the possibility of an interest rate hike.
Although Federal Reserve Chairman Alan Greenspan hasn't said anything new in the past week about raising interest rates, investors' fears have increased that next week's Federal Open Market Committee meeting could be the one at which the Fed finally acts to stave off inflation.
Bank bond analyst Eric Grubelich of Keefe, Bruyette & Woods Inc. said that spreads-the basis-points difference between Treasury yields and bank bonds-have widened, which means that investors are insisting on more yield for the risk they take.
People sense that the Fed may raise interest rates, "and because they do, trust-preferred securities are going to be the first thing to be kicked out of the portfolio, because of their longer maturities," said Mr. Grubelich. The threat of a rate hike "remains fresh," he said, noting that Mr. Greenspan raised the spectre in congressional testimony ecently.
Spreads have also widened because several large money managers last week proposed to sell close to $1 billion of debt on the secondary market, sources said.
A sizable portion of the debt-including issues of $250 million, $250 million and $100 million-"was bank paper, and a good portion was trust- preferred securities," said one money manager, who asked not to be identified.
"This week we have seen as much selling as we've probably seen in a year," said another money manager, Ted Reed of Back Bay Advisors. "Investors tend to sell bank paper because it is very liquid."
Money manager Steven Bohlin of Thornburg Management also noted an increase in bank paper last week and said he suspects it will continue this week.
He predicted the fear of a rate hike would crease a "bias toward selling" of debt issued by financial firms.
Another indication that investors are becoming more cautious is the recent issue of trust-preferred securities by Summit Bancorp. Most traders agreed that the issue sold well, but they pointed out that the enthusiasm that greeted trust-preferred securities deals of the past is gone.
"There is a solid investor base that has cash to invest in capital securities, but at the same time we are not seeing overheated selling," said one trader, who asked not to be named. "Investors are more disciplined in their buying and less subject to runaway hot deals."
However, others dismissed last week's selling as profit taking rather than an indication of interest rate fears.
"It has nothing to do with credit," said one trader, who requested anonymity. "We are at the point in the business cycle where institutional investors are revisiting their portfolios."