By Patrick McGee
Of DOW JONES NEWSWIRES
JANUARY 20, 2012, 5:53 P.M. ET
Article from The Wall Street Journal
NEW YORK (Dow Jones)--Investors were snatching up bank bonds in the secondary market this week, pushing yields to multi-month lows as risk-perception in Europe subsides.
Investors showed follow-through buying on bank bonds offered to the market Thursday, when Goldman Sachs Group (GS), Citigroup (C), and Bank of America (BAC) offered a combined $7 billion of new debt.
"The fact we could absorb all that supply in a day is very telling," said John D. Ryan, portfolio manager at DWS Investments, who said investor appetite for riskier assets has picked up globally. "With rates where they are at, we've definitely seen a flood of issuance from quality issuers."
The three banks accounted for nearly half of the $14.5 billion of investment-grade debt issued this week, according to Dealogic. The first two weeks of the year saw $23.1 billion and $28.8 billion of volume.
In the primary market, yields are so low that banks can offer a decent-sized concession to entice investors, yet still be enthused with the overall low borrowing cost.
"They are happy with the all-in yields, and we are happy with 20-30 basis point discounts to where things were trading," Ryan said.
Yet just one borrower opted to take advantage of the favorable conditions Friday, and no senior unsecured debt was on offer.
The Bank of Nova Scotia (BNS) sold $2.5 billion of five-year covered bonds Friday, pricing the 1.95% coupon bonds to yield 1.977%, or 109.1 basis points over the Treasury rate.
That represents about 63 basis points in savings compared to Scotia's senior unsecured offering earlier this month, when it sold $1.25 billion of 2.55% coupon, five-year senior unsecured bonds priced to yield 2.593%, or 172 basis points over Treasurys. The Jan. 5 sale was part of a three-tranche, $2.75 billion offering rated Aa1 by Moody's Investors Service and AA-minus by S&P.
The three major deals from Thursday were some of the most actively-traded bonds in Friday's market.
The risk premium, or spread, on Goldman's 10-year bonds improved 17 basis points from issuance to 363, and the spread on Citi's 30-year bonds tightened 12 basis points from issuance to 285, MarketAxess data shows.
Bank of America's 10-year bond was the outlier, as the spread actually widened, or deteriorated, two basis points from issuance to 380 basis points.
Markit's CDX North America Investment Grade Index, a measure of health in the corporate bond market, was on track to improve 1.8% to 105.9 basis points, which would be the lowest closing level since August 5, when it was at 103. A lower level indicates improving sentiment.
On Thursday, Barclays Capital investment-grade corporate bond index improved one basis point to a spread of 221 basis points, the narrowest spread since November 14. The index has improved four basis points this week and 13 basis points year-to-date.
"People definitely came into this year more bulled up," Ryan said. "People are getting more comfortable that liquidity won't be a problem even if insolvency problems in Europe are unresolved."
The multi-day bond rally was initiated by a non-event--the absence of a market sell-off early this week following the Standard & Poor's move last Friday to downgrade nine euro-zone countries. The move stripped France and Austria of triple-A ratings, and lowered Italy by two notches to BBB-plus from single-A.
"The expectation was that European markets would react negatively, and they basically ignored it," said Mark Alexandridis, managing director of asset management at First Principles Capital. "All of these downgrades have been priced in. I don't think there was a soul on the planet who thought Italy was a single-A country last Thursday."
-By Patrick McGee, Dow Jones Newswires; 212-416-2382 ; patrick.mcgee@dowjones.com
Article from The Wall Street Journal