With FDIC Backing, Are Bank Bonds Better Than Treasuries?

Last week, Goldman Sachs, Morgan Stanley and JP Morgan Chase issued $17.5b in bonds in two days. This appetite for new credits is due largely to the new FDIC Temporary Liquidity Guarantee Program, and investors are interested because it makes bank bonds (and bonds of other qualified institutions) as safe as Treasuries because of the government backing. The WSJ reports:

Barclays Capital fixed-income analyst Rajiv Setia estimates financial institutions may use the program to issue $250 billion to $350 billion of debt by June 30 of next year, when the issuing period expires. Approximately $215 billion of U.S. bank debt is set to mature during the first two quarters of 2009, according to Dealogic. Mitch Stapley, chief fixed-income officer for Fifth Third Bank who has bought some of the new bonds, classifies them as better-yielding Treasury bonds.

On Tuesday, three-year Treasurys yielded 1.37%. In comparison, Goldman Sachs’s new three-year guaranteed bonds were priced with a yield of 3.367%, Morgan Stanley’s sold with a yield of 3.262% and J.P. Morgan’s notes yielded 3.147%.

Citigroup Inc. and Bank of America Corp. have said they are preparing to sell FDIC-backed deals as early as next week, and others are sure to follow.

Goldman Sachs was the first firm to offer the new bonds. It sold a $5 billion three-year issue at a risk premium of two percentage points over Treasurys on Monday. That issue snapped after it was freed to trade, fetching a risk premium of 1.84 percentage points in the secondary market.

And J.P. Morgan sold a combined $6.5 billion of securities Wednesday. The bulk of the issue consisted of J.P. Morgan’s $5 billion three-year fixed-rate note, which was sold at a risk premium of 1.775 percentage points over Treasurys.