BofA, JPMorgan Debt Sales Show Contagion is Ebbing

Photographer: Nell Redmond/Bloomberg

Bank of America corporate headquarters in downtown Charlotte. Close

Bank of America corporate headquarters in downtown Charlotte.

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Photographer: Nell Redmond/Bloomberg

Bank of America corporate headquarters in downtown Charlotte.

Bank of America Corp., JPMorgan Chase & Co. and HSBC Holdings Plc raised $7.65 billion in the bond market as investors grow more confident Europe’s debt crisis will be contained, averting another credit freeze for lenders.

Bank of America’s $3 billion offering was its first benchmark issue of dollar-denominated 10-year notes in a year, according to data compiled by Bloomberg. New York-based JPMorgan boosted its sale by 25 percent to $1.25 billion as relative yields on U.S. bank debt fell for a fourth day, the longest streak since March, while HSBC raised $3.4 billion in the biggest global issue of undated dollar notes since October 2008.

The banks’ offerings come as Spain sold 3.5 billion euros ($4.3 billion) of bonds yesterday and announced a plan today to issue new 10-year notes via banks, easing concern the nation will struggle to finance looming debt maturities. Even as potential regulations loom, U.S. banks are taking advantage of “very attractive financing rates and a receptive marketplace,” said Wells Fargo Funds Management’s James Kochan.

“There’s a lot less fear among investors than was true a week ago or a month ago,” said Kochan, who helps oversee $179 billion as chief fixed-income strategist for the firm in Menomonee Falls, Wisconsin. “Things are calming down a bit in world markets.”

Deutsche Bank AG, Germany’s biggest bank, issued 1 billion euros of so-called lower Tier 2 bonds that were priced to yield 210 basis points, or 2.1 percentage points, over swaps, according to a banker involved in the deal. Credit Suisse Group AG added 550 million euros to its existing 4.75 percent bonds due August 2019, according to data compiled by Bloomberg. The additional notes yield 180 basis points more than similar- maturity German debt.

HSBC Sale

The 5.625 percent, 10-year issue from Charlotte, North Carolina-based Bank of America priced to yield 248 basis points more than Treasuries, Bloomberg data show. A benchmark offering is typically at least $500 million. JPMorgan’s 3.4 percent, five-year notes pay a spread of 145 basis points.

HSBC, Europe’s largest bank, sold the perpetual securities that are callable after 5.5 years with a coupon of 8 percent today, at the lower end of the marketing range of 8 percent to 8.125 percent, according to a person with knowledge of the deal. The issue was the largest of its type since Credit Suisse sold $3.5 billion of 11 percent notes in October 2008, according to data compiled by Bloomberg.

Ally Bank

Elsewhere in credit markets, the extra yield investors demand to own corporate bonds instead of government debt fell 1 basis point to 197 basis points, Bank of America Merrill Lynch’s Global Broad Market Corporate Index shows. Yields averaged 4.068 percent.

GMAC Inc.’s Ally Bank boosted the size of its offering of bonds backed by auto loans to $1.2 billion from $792.3 million, according to a person familiar with the transaction. The largest top-rated portion, a $448 million slice maturing in about 2.2 years, will yield 25 basis points more than the benchmark swap rate, said the person, who declined to be identified because the terms aren’t public.

Benchmark indexes of corporate credit risk in the U.S. and Europe fell. The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 3.3 basis points to a mid-price of 110.25 basis points as of 12:06 p.m. in New York, the lowest since May 31, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings decreased 4.7 basis points to 117.4, Markit prices show, the lowest since May 18.

Bondholder Protection

The indexes typically fall as investor confidence improves and rise as it deteriorates. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Bank of America and JPMorgan’s offerings led $7.35 billion of U.S. corporate bond issuance, the busiest day since April 21, when $12.3 billion was sold, Bloomberg data show. That tally of straight bond sales doesn’t include HSBC’s perpetual notes issue. The offerings from the two largest U.S. banks by assets and Europe’s No. 1 lender follow a $750 million sale by Radnor, Pennsylvania-based Lincoln National Corp. on June 15 and a $1 billion offering June 16 from Prudential Financial Inc. of Newark, New Jersey.

‘Positive Tone’

“Both JPMorgan and Bank of America are coming on the back of a couple good days of a positive tone in the market,” said Brian Machan, a money manager at Aviva Investors North America in Des Moines, Iowa. “Seeing Prudential do well and Lincoln National come earlier this week set the precedent.”

Spreads on financial company bonds fell to 277 basis points, the lowest in two weeks, according to Bank of America Merrill Lynch’s U.S. Corporates, Banks index. Relative yields reached 286 basis points on June 11, the highest since October.

Banks are making the most of investor demand before regulatory changes that could reduce profitability, said Scott MacDonald, head of credit and economics research at Aladdin Capital Holdings LLC in Stamford, Connecticut, which oversees $12.5 billion.

Congress is debating sweeping changes to financial regulations that may hamper bank profits after the collapse of the housing market caused the worst recession since the 1930s and the loss of more than 8 million U.S. jobs.

‘Floodgates Have Opened’

“The floodgates have opened and banks are taking advantage,” MacDonald said. “From a strategic standpoint, they’d rather come in ahead of the curve than play catch up.”

Spain sold its debt at an average yield of 4.864 percent, less than the 5.04 percent its 10-year bonds traded at yesterday before the sale. Demand was 1.89 times the amount on offer. It also sold 479.2 million euros of 30-year debt at 5.908 percent, and the bid-to-cover ratio was 2.45, higher than the 1.38 at the previous sale on March 18.

Spain’s finance ministry said today the government will sell bonds in the third quarter through a group of banks, without naming the managers of the issue. It also announced auctions of debt with maturities ranging from 2015 to 2041.

“The strong demand for Spanish bonds should help restore confidence,” said Ciaran O’Hagan, fixed income strategist at Societe Generale in Paris. “The good demand was only possible after considerable cheapening of Spanish bonds over the past days.”

To contact the reporter on this story: Tim Catts in New York at tcatts1@bloomberg.net

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