Bank Bonds Still Trade at Discount

Gap between spreads on industrial, financial debt has doubled from a year ago.

The biggest U.S. banks will need more than the Federal Reserve’s stamp of approval before they receive an all-clear signal from the bond market.

While relative yields on their bonds narrowed to 265 basis points, the lowest since August, that’s almost 1 percentage point above last year’s low of 173 in April, according to Bank of America Merrill Lynch index data. The gap between spreads on industrial and financial debt has more than doubled from a year ago and credit-default swaps on the six-biggest U.S. banks are 83 basis points higher than last April.

Bondholder Protection

The index typically falls as investor confidence improves and rises as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Mortgage Litigation

The Fed tests were “a bigger story for equity” as “the credit market remains more focused on the Moody’s actions,” JPMorgan analysts Kabir Caprihan and Matthew Hughart wrote in a March 14 note.

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