The big US banks hit the high-grade bond market in force on Monday in a sign that investors still see these issuers as among the most resilient in the country's corporate debt markets, even after they reported lackluster earnings.
Morgan Stanley, Wells Fargo and JPMorgan Chase are in the market today with bond offerings after all three reported second-quarter results last week that fell short of analyst expectations. Market participants nonetheless still consider these lenders – and US banking sector as a whole – to be particularly robust in the face of an economic downturn.
The Federal Reserve found in its latest annual stress test that banks could still extend lending to households and businesses even after suffering from severe losses.
"After the Fed’s stress test, people view US banks as pretty secured and are willing to buy the risk. And those yields are up too and people are able to get higher yields than a year ago," said Stan Shipley, strategist at Evercore ISI. "I wouldn’t be surprised if the deals find good demand and will be oversubscribed."
Investment bank Morgan Stanley is out with an offering of fixed-to-floating rate senior notes, including a US$2bn four-year non-call three and a US$2bn 11-year non-call 10. The bank launched notes at Treasuries plus 152bp and 192bp, respectively, with each portion tightening 23bp from price thoughts.
Rated A1/A-/A, the bank has issued US$15.5bn of senior unsecured bonds this year, according to IFR data.
With the bank's fixed-income trading revenues still showing rapid year-over-year growth in the second-quarter, the timing of Morgan Stanley's bond deal could indicate the investment bank sees opportunities for growth in it trading division, said CreditSights analysts.
They noted Morgan Stanley was among the more well-capitalized banks, as its CET1 ratio stood at 15.2%, well above regulatory requirements.
Balance sheet strength
Large money managers have spoken of the attractiveness of high-quality bank paper, as financial balance sheets remain strong.
"In the investment-grade space, the higher-quality areas of the market make some sense to add potential yield. High-quality bank paper is one example. You could see one-and-a-half, even two percentage points above a Treasury yield," said Dan Ivascyn, Pimco's group chief investment officer, in a blogpost from last Thursday.
The inclusion of longer-dated maturities in today's batch of offerings also indicated the market for extended tenors was open. The benchmark 10-year US Treasury yield is now at around 3% on Monday, having climbed to an 11-year high of 3.48% in mid-June.
Money-center banks Wells Fargo and JPMorgan Chase are both marketing six-year non-call five and 11-year non-call 10 notes. Wells Fargo guided its six-year and 11-year to 175bp and 195bp over Treasuries, with both tranches seeing around 25bp of price progression.
With reporting from Richard Leong