RPT-US bank spreads tightening back to pre-crisis strength

Mon Oct 22, 2012 4:07am EDT
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By Danielle Robinson

NEW YORK, Oct 19 (IFR) - US banks are trading through one of the major industrial sectors in terms of spread for the first time since the 2008 crisis, and are just a few basis points away from regaining their long-held position of having tighter spreads than corporates in the US.

The Financial Institution Group's (FIG) option adjusted spread, as measured by the Barclays Corporate Index, closed at 150bp on Thursday, compared with Basic Industries' OAS of 170bp.

And if subordinated debt is removed from the FIG segment of another index, the Bank of America Merrill (BofA Merrill) Master Index, to give a more like-for-like comparison with corporates, the OAS of banks is now just 4bp away from the industrial segment's 137bp, as measured by BofA Merrill's index.

"This is exactly what we thought would happen," said Michael Collins, a chief investment officer at Prudential, whose team was one of the few to go out on a limb and buy US banks at their widest levels last year.

"The big question now is whether the FIG sector can trade on top or through the industrial sector," Collins said.

Credit strategists have little doubt that it will.

"It's all come together for the US banks this year, in terms of their much better capital structure, improving US real estate market and a significant drop in European tail risk," said Hans Mikkelsen, senior credit strategist at BofA Merrill.   Continued...