Investors have taken a shine to Wells Fargo & Co. bonds.

The bonds have rallied sharply since January, narrowing their spreads over comparable Treasuries by 100 basis points. That's a much better performance, for example, than the bonds of its higher-rated California rival, BankAmerica Corp.

As of Monday, Wells' 10-year subordinated bonds were quoted to yield only four basis points more than BankAmerica's, at 87 basis points over Treasuries, versus 83, according to Ann Robinson, a bond analyst at Donaldson, Lufkin & Jenrette Securities Corp.

Back in January, Wells Fargo's 10-year subordinated bonds were yielding 65 basis points more than comparable BankAmerica debt.

Disappointing BankAmerica

"Wells has turned in a very solid performance," said Ms. Robinson. "BankAmerica is kind of stable but something of a disappointment because of the drag of Security Pacific, which they are handling, but at a slower pace than people expected."

The yield spread of BankAmerica bonds has improved this year by roughly 42 basis points.

Wells' subordinated debt is rated Baa1 by Moody's Investors Service and BBB-plus by Standard & Poor's Corp. BankAmerica's bonds carry ratings of A3 and A-minus, respectively.

Wells has one of the largest concentrations of commercial real estate loans in the banking industry. Problems in the portfolio weighed on its bonds at the end of 1992. But the San Francisco-based company has posted strong earnings this year while sharply reducing its level of non-performing assets, despite the recession in its home California market.

Upgradings by Rating Agencies

As a result, the bank's debt was upgraded this month by Moody's and by Thomson BankWatch. Its subordinated debt was raised to Baa1, from Baa2. by Moody's and to A, from A-minus, by Thomson.

Wells earned $422 million in the first nine months of 1993, compared to $225 million in the 1992 period. Nonperforming assets, restructured loans, and foreclosed property dropped to $2 billion at the end of September, compared to $2.9 billion at the end of September 1992.

Ratings upgraqes let the bank raise funds at more attractive rates.

Wells Takes Advantage

One example of this is the $300 million of medium-term notes that Wells issued last week. The offering comprised $150 million of three-year senior debt and $150 million of two-year senior debt. The two-year issue was said to carry a reoffer price of 18.75 basis points over the London interbank offered rate, and the three-year issue was said to be offered to investors at a yield of 25 basis points over Libor.

A bank spokeswoman said the issue was for general corporate purposes; she declined to comment further.

Ms. Robinson has been recommending swaps into Wells bonds and out of BankAmerica since the start of the year. She continues to recommend such trades, saying Wells bonds are unlikely to trade at lower yields than BankAmerica's but that Wells currently has stronger credit characteristics.

Joseph Labriola, an analyst at Kidder, Peabody & Co., said Wells Fargo bonds are unlikely to tighten unless the bank gets another ratings upgrade, which he said would probably not happen until late 1994 at the earliest.

Bank of Boston Issue

Elsewhere in the market, Bank of Boston Corp. issued $350 million of 12-year subordinated notes Monday. The issue was priced to yield 6.67%, equal to 100 basis points above the 10-year U.S. Treasury note.

Rated Baa2 by Moody's and BBB by Standard & Poor's, the issue was sold through underwriters led by Merrill Lynch & Co.

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