A fresh asset class is quickly carving a new niche for itself on Wall Street.
In just two days, Goldman Sachs Group Inc., Morgan Stanley and J.P. Morgan Chase & Co. sold a cumulative $17.25 billion of government-guaranteed bank bonds as part of the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program.
The program has opened the financing door for banks that were otherwise shut out from repaying or refinancing debt as a result of the credit crisis. The government guarantee allows banks and firms that have been approved to participate, such as General Electric Co., to take advantage of cheap financing.
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.
"With yields on Treasury bonds that can make a goat just about choke, these are a no-brainer alternative," Mr. Stapley said.
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%.
Reduced credit risk coupled with additional yield has helped the new bonds blaze their way into portfolios.
Mr. Stapley and others expect the market for these bonds will continue to flourish and anticipate a surge of supply next week.
"The universe for this product is growing day by day as more and more accounts sign on and/or get approval to participate in the program," according to Paul Spivack, head of U.S. debt syndicate at Morgan Stanley.
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.
Global interest in the new bonds also has been sparked, as the FDIC will insure debt that is denominated in a foreign currency. J.P. Morgan is planning to sell a two-part, euro- and sterling-denominated bond issue under the FDIC program, a person familiar with the situation told Dow Jones Newswires on Wednesday.
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.
Morgan Stanley sold a total of $5.75 billion of bonds in four parts Wednesday.
According to syndicate participants who worked on the deal, 347 investors placed orders for the debt, with 70% of the debt sold going to U.S. buyers, 20% landing in European hands and only 10% going to Asia.
The Morgan Stanley deal was the first issued under the government program to include a floating-rate note, an instrument recently absent from the corporate-bond primary market.
The Morgan Stanley fixed-rate notes also traded well 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.
Source: http://online.wsj.com/article/SB122782428906462449.html
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