JPMorgan Chase & Co. (JPM), deemed by derivatives traders to be the most creditworthy of the six biggest U.S. banks, locked in the lowest interest rate its industry has seen since 2005 on 30-year debt.
The biggest U.S. bank by assets sold $1.25 billion of 5.4 percent debentures yesterday to yield 250 basis points, or 2.5 percentage points, more than similar-maturity Treasuries, according to data compiled by Bloomberg. Goldman Sachs Group Inc., the only other U.S.-based bank to have issued 30-year debt in 2011, sold $2.5 billion of 6.25 percent bonds at a 170 basis- point spread on Jan. 21.
JPMorgan is pushing out the maturities of its debt as yields on investment-grade corporate bonds due in 15 years or more approach the lowest on record while the Federal Reserve holds down interest rates to stimulate the economy. The New York-based bank has raised $4.25 billion by selling 30-year debt since issuance of the securities by banks resumed in October 2010 after a 15-month pause, Bloomberg data show.
“JPMorgan is one of the few in the market now that can issue these bonds, and a big reason is investors think they’re one of the best banks out there,” Rob Crimmins, a New York- based money manager at RS Investment Management Co., which oversees $30 billion. “In this environment, there aren’t many banks that would be able to sell 30-year bonds.”
Justin Perras, a spokesman for JPMorgan, declined to comment on the sale.
JPMorgan wasn’t among nine large banks including Bank of America Corp. (BAC), Barclays Plc and Deutsche Bank AG downgraded yesterday by Fitch Ratings, which found they are “particularly sensitive to the increased challenges the financial markets face,” according to a statement.
The debt sold yesterday has the lowest coupon among 30-year U.S. bank bonds since San Francisco-based Wells Fargo & Co. (WFC) issued $750 million of 5.375 percent debt at an 80 basis-point spread in January 2005, Bloomberg data show. The securities climbed 1.36 cents to 101.2 cents on the dollar to pay a 245 basis-point spread as of 10:53 a.m. in New York, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.
In its previous offering of 30-year bonds, JPMorgan sold $1.75 billion of 5.6 percent debt that paid 140 basis points, or 1.4 percentage points, more than similar-maturity Treasuries on July 14. The bank issued $1.25 billion of 5.5 percent, 30-year bonds at a 165 basis-point spread on Oct. 14, 2010, the first sale since Citigroup Inc. (C) issued $2.5 billion of the debt in July 2009, Bloomberg data show.
JPMorgan’s offerings extended the average maturity of its outstanding bonds to 6.5 years at the end of the third quarter from 5.66 years in the first quarter of 2010, Bloomberg data show. The bank’s average coupon fell to 5.01 percent from 5.19 percent. It has sold the most 30-year debt among its peers since October 2010.
HSBC Holdings Plc based in London and Utrecht, Netherlands- based Rabobank Nederland NV also issued debentures of that maturity this year.
Banks have sold $323.9 billion of debt in the U.S. this year, with more than 97 percent coming due within 10 years, Bloomberg data show.
The extra yield investors demand to own U.S. bank bonds instead of Treasuries has risen to 395 basis points from 210 basis points since the end of 2010, according to Bank of America Merrill Lynch index data. Spreads touched 403 on Nov. 29, the widest since July 2009.
Yields on investment-grade bonds due in 15 years or more averaged 5.21 percent yesterday, after falling from 6.16 percent in February, according to Bank of America Merrill Lynch index data. They touched 5.02 percent, the lowest in daily data extending to October 1986, on Nov. 1.
Spreads have widened on financial company bonds as concern among investors mounted that Europe’s sovereign debt crisis would spread, imperiling the global economy. That has made JPMorgan and other U.S. banks more attractive to fixed-income investors, said Anthony Valeri, a market strategist at LPL Financial, which manages $330 billion.
“Financials in general and certainly the stronger ones are good value in this market,” Valeri said in a telephone interview from San Diego. “We don’t think the bank sector’s going to implode. We think exposure to Europe is manageable for U.S. banks, and therefore this risk premium is significantly large right now to where it offers an opportunity.”
Credit-default swaps on JPMorgan, which investors use to hedge against losses on the company’s debt or to speculate on creditworthiness, fell to 145.9 basis points yesterday from 182 basis points on Nov. 25, according to data provider CMA. That means investors pay $145,900 a year to protect $10 million of the bank’s debt for five years.
Other Bank Swaps
Contracts on Wells Fargo were at 146.2 while those for Bank of America reached 402.5. Swaps on Citigroup were 274.7, contracts protecting the debt of Goldman Sachs Group Inc. (GS) traded at 313.4 and those on Morgan Stanley (MS) were at 416.6, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. The contracts, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decline as investor confidence improves and rise as it deteriorates.
Moody’s Investors Service assigns JPMorgan a rating of Aa3, its highest grade on any of the six biggest U.S. banks. Fitch holds a rank of AA- on it and Wells Fargo. Standard & Poor’s ranks Wells Fargo A+ and JPMorgan A.
JPMorgan’s ratio of tangible common equity to tangible assets, a measure of its ability to absorb losses, is the lowest among the six biggest U.S. banks at 5.49, Bloomberg data show. Jim Leonard, a Chicago-based credit analyst at Morningstar Inc., cited the ratio when downgrading the lender to A from A+, calling the level “a cause for some concern” in a note yesterday.
Investors buying JPMorgan’s bonds are looking past any financial weaknesses and giving it credit for Chief Executive Officer Jamie Dimon’s performance in the wake of Lehman Brothers Holdings Inc.’s 2008 bankruptcy, when the firm avoided losses, Leonard said.
“Their credit metrics are OK, but not stellar,” Leonard said in a telephone interview. “What is stellar is their reputation and their performance during the credit crisis. When you think about the credit quality of banks, at some point you have to trust management knows what it’s doing.”
To contact the reporter on this story: Tim Catts in New York at firstname.lastname@example.org.