Bank bonds have been outperforming most other industry sectors as most of the financial institutions are looking to reduce their supply of debt and have been trying to boost capital for meeting the new risk-curbing regulations.
Bank of America and Lloyds banking Group Pl car leading with 8.1 % returns on dollar-denominated bank notes from the end of the year as compared to the 5.4 % on non-financial bonds, as per the data on Bank of America Lynch Index. During last year, the bank bonds were the worst performers gaining only 1.71 %.
Lenders in a response to the Basel III and Dodd-Frank regulation overhauls are trying to reduce the amount of debt for the very first time since 1991, according to the data on Bank of America Merrill Lynch Index. The securities, this year, are returning twice as much as the stocks; this after Moody’s had downgraded top 15 international banks, amidst a growing confidence that they can tackle deepening crisis in Europe and an overall global slowdown.
Someone who is a bank bond holder, will be looking at an institution that will be having more cash, more conservative financial profile and less leverage, which would make them less worried over the growth prospects as compared to stability, according to market experts.
Investors in bonds are now targeting the debts of financial companies that will be yielding 3.45 % as compared to the 3.05 % yield of industrial bonds in the US, as per Bank of America Merrill Lynch Index data.
Bank borrowing costs have come down from the highs of last year of 5.05 per cent as on Nov 30, 2011.
There is a lot of risk premium tied into the bank space at the end of the year as a result of dislocation due to European crisis and those who are willing to take greater risks are getting paid more.