Nov. 25 (Bloomberg) -- Goldman Sachs Group Inc. sold $5 billion of notes backed by the government, while Morgan Stanley, JPMorgan Chase & Co. and Bank of America Corp. are preparing offerings, as banks take advantage of a new U.S. program to guarantee debt.

The four banks are the first to start offerings since the Federal Deposit Insurance Corp. last week completed rules to strengthen its guarantee. The backing lets banks sell AAA rated debt, allowing them to attract investors after being unable to sell bonds since September.

The guarantee opens a new avenue for bank funding amid a credit seizure that has sent investment-grade financial debt yields up more than five percentage points this year to a near- record high of 7.28 percentage points above Treasuries, according to Merrill Lynch & Co. index data. Banks may raise $400 billion to $600 billion under the FDIC program within six months, Barclays Capital analysts estimated in October.

“This is extremely helpful to them,” said Matthew Eagan, a vice president and portfolio manager at Loomis Sayles & Co. in Boston which manages more than $100 billion in assets. “They have a bunch of debt that’s coming due over the next three years, and normally they’d be in the market opportunistically issuing debt.”

Maturing Debt

The FDIC said Oct. 14 it would guarantee three-year senior unsecured bank debt issued through June 30, helping the banks refinance maturing debt. Bank and finance companies have $240 billion coming due from December through June 2009, according to Eric Rosenthal at Fitch Ratings in New York. That compares with maturities of about $213.9 billion in the same period a year earlier.

“Short-term dislocations for the banks will be helped by this,” said Timothy Policinski, managing director at Fort Washington Investment Advisors Inc. in Cincinnati, which manages about $23 billion in fixed-income assets. “It’s important for the banks.”

Issuance from the banks, along with the Federal Reserve’s commitment of $800 billion to make it easier for Americans to obtain mortgages and consumer loans, is increasing demand for credit, Policinski said.

Default Risk

The risk of U.S. companies defaulting on their debt fell for a third day, with contracts on the Markit CDX North America Investment Grade Index of 125 companies in the U.S. and Canada decreasing 11.5 basis points to 245 basis points as of 9:23 a.m. in New York, according to broker Phoenix Partners Group. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates deterioration in the perception of credit quality; a decline, the opposite.

New York-based Goldman’s 3.25 percent notes were priced to yield 200 basis points more than similar-maturity Treasuries, according to Bloomberg data. Proceeds will be used for general corporate purposes. A basis point is 0.01 percentage point.

By comparison, Goldman’s $2.23 billion of 5.7 percent notes due in September 2012 traded yesterday at 90 cents on the dollar to yield about 8.8 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

‘Cheap Funding’

Goldman “wants to take advantage of this cheap funding,” Eagan said. “They can use this program to issue low cost debt. They can use it until they don’t need it anymore, which could be for a while.”

Goldman last sold dollar-denominated debt on April 22, raising $1.5 billion in a reopening of 6.15 percent notes due in 2018, according to data compiled by Bloomberg. The senior notes priced to yield 237.5 basis points more than Treasuries of similar maturity, according to the data.

“We don’t think these are cheap bonds at all” relative to other corporate debt, said Michael Donelan, who manages $2.25 billion of bonds at Ryan Labs Inc., a money management and research firm in New York. “We are pursuing it more vis-à-vis looking at the senior agency debenture market,” said Donelan, who bought Goldman bonds.

Agency Debt

So-called agency debt, mainly Fannie Mae, Freddie Mac and Federal Home Loan Bank borrowing, also has government support. The difference between yields on Washington-based Fannie Mae’s three-year debt and similar-maturity Treasuries, was 144 basis points at 12:30 p.m. in New York, according to data compiled by Bloomberg.

Morgan Stanley and JPMorgan plan benchmark sales, which typically means at least $500 million. Morgan Stanley’s notes will mature in either two or three years, or possibly both. JPMorgan plans to sell three-year notes. Its debt will be denominated in dollars, pounds and euros. Morgan Stanley and JPMorgan are based in New York.

Bank of America, based in Charlotte, North Carolina, plans to sell debt as soon as Dec. 1 that will mature no later than June 2012, according to a person with knowledge of the transaction.

GE Capital Corp., the lending arm of Fairfield, Connecticut- based General Electric Co., filed an amendment today to an original filing that will allow it to sell FDIC-backed bonds.

“I think that we’ll start to see other banks take advantage of this as well,” Eagan said.

To contact the reporters on this story: Caroline Salas in New York at csalas1@bloomberg.net; John Detrixhe in New York at jdetrixhe@bloomberg.net

Last Updated: November 25, 2008 12:47 EST