Goldman, PNC jump in as financials stay red-hot

NEW YORK, Oct 17 (IFR) - Goldman Sachs and PNC Bank jumped into the bond market on Wednesday, coming out with new issues to take advantage of an investor rush into the red-hot financials sector.

Both banks announced better-than-expected earnings the previous day, and are coming to market just as many investors are furiously scooping up financial issues - not least to unravel previous bets that the sector's rally would not hold.

"Some people have been doubting this recent rally in FIG (Financial Institutions Group), and have been waiting for weeks for spreads to back up," David Knutson, senior FIG strategist at Legal & General Investment Management America, told IFR.

"But in the last 24 to 48 hours we've seen a new phase in the rally, because of (investors') capitulation."

In fact, FIG spreads have been tightening across the board, even for names like Bank of America, which didn't wow the market with its third-quarter earnings.

"This is exactly what we thought would happen," said Michael Collins, a chief investment officer at Prudential, whose team bet on BoA bonds when they were at their widest last year.

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

"And I would argue yes, because banks should be seen as something of a safe haven from event risk in industrial names."

Goldman Sachs and PNC are both marketing new issues to top up their capital for regulatory requirements.

Goldman is looking to do a benchmark-sized tier 1 perpetual preferred non-cumulative issue in the US$25 par retail market, and PNC Bank a US$1bn Tier II 10-year subordinated offering.

EVERYTHING'S ALRIGHT, UP TIGHT

The latest wave of FIG tightening began on Monday. Although that is partly due to the insatiable demand for yield driving corporate bonds tighter this week, some also see the thirst for FIG as driven by traders who were short the sector and are being forced by investment committees to cover those shorts before the typical pre-holiday slowdown in November and December.

Goldman Sachs 5.75% 2022s tightened in 19bp on Wednesday morning to 163bp, and are 31bp tighter since Friday's close.

Bank of America's 5.7% 2022s were 17bp tighter on Wednesday morning at 124bp, from a Friday close of 155bp. The 22s were 340bp over Treasuries at the end of January.

BoA's 5% 2021s were trading at 130bp on Wednesday, a whopping 275bp tighter than the 405bp spread it traded at in October 2011.

In fact, FIG spreads overall are just a hair's breadth away from trading through industrials again, as they had always done before the onset of the financial crisis.

According to the Barclays Corporate Index, the FIG sector's spread was 159bp at Tuesday's close - just 36bp away from the 159bp spread on the Barclays sub-index for industrials.

Already FIG's option-adjusted spread of 159bp in the Barclays index is trading tighter than some sub-indexes of the industrial sector, such as Basic Industry (178.6bp), and is close to trading on top of Communications (152.9bp) and Transportation (149.9bp).

In early October last year the FIG spread of 361bp was a massive 163bp wider than the 198bp spread for industrials.

Even so, many investors believe there's room for further tightening still, especially given the continued chase for yield and the flushing out of traders who still had shorts on certain financial names.

Can bank spreads tighten to the point where the financial sector regains its pre-crisis status as a blue-chip sector that trades tighter than the industrial sector?

"Fundamentally banks are in very good shape," Prudential's Collins said.

"Industrials have exposure to a drop in exports as Europe slows, and are more likely to leverage up than banks as they look to return value to shareholders via share buybacks when earnings are subdued in a slow growth environment."

Some investors are even looking for higher-beta FIG names, like European peripheral bank debt in dollars and euros, as well as obscure European financials like LeasePlan.

The Dutch bank debuted in the Yankee market on Monday with a US$500m five-year issue - after attracting a stunning US$2.5bn of orders.

"This is the kind of name you wouldn't have bothered picking up the phone for a month ago," one investor said. "And now everyone wants it."

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