Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

Well, here's something you don't see every day: A bond trader who's optimistic about the economy.  

And not just any bond trader but one who manages a fund that has beaten 98 percent of its peers so far in 2015 and who was named Morningstar's fixed-income fund manager of the year for 2014. Carl Eichstaedt runs the $15.3 billion Western Asset Core Plus Bond Fund and is betting big on the debt of U.S. banks on the notion that they'll benefit as a stronger U.S. economy prompts the Federal Reserve to push interest rates higher, as Daniel Kruger and Wes Goodman reported Monday.

Eichstaedt's bullishness points to an important development in the push to make banks safer in the wake of the financial crisis:  The effort seems to be working, or at least working enough to entice a best-of-class bond-fund manager like this into overweight positions on their debt.

Equity investors, on the other hand, seem to be the flip side of this coin. When factoring in both long and short positions, hedge funds collectively are underweight financials by almost seven percentage points compared with the firms' 18 percent weighting in the Russell 3000 Index, according to a report from Goldman Sachs. That is the biggest underweight among 10 industry groups.   

The lack of conviction on financial stocks shows that for all the talk about the potential for higher net-interest income in a rising interest-rate environment, it's clear there is still lingering skepticism about the group. In fact, looking at the valuations of two of the companies singled out by Eichstaedt -- Goldman Sachs and Wells Fargo -- shows how the hangover from the financial crisis is still raging. 

Goldman Sachs traded for as much as 3.7 times tangible book value before the recession, and rarely traded below 2 times. Since then, the valuation has been stuck well below its pre-crisis levels, currently at about 1.1 times tangible book: 

Stuck in Neutral
Goldman Sachs's valuation has been well below its pre-crisis levels.
Source: Bloomberg

Meanwhile, its assets aren't producing considerably less in returns:  

On the Rebound
Income as a percentage of total assets is not much different from its pre-crisis levels.
Source: Bloomberg

Goldman's business is dominated by trading and investment banking, of course, but charts for other banks with more traditional deposit-and-loan business models depict a similar trend. The entire KBW Bank Index, for example, is trading at about 1.5 times tangible book value, less than half of its average in the five years through April 2007 even though return on assets has recovered to about 70 percent of what it was in the same pre-crisis period.  

Valuation Equation
The KBW Bank Index is trading at less than half of its average in the five years through April 2007 even though return on assets has largely recovered.
Source: Bloomberg

For value-oriented investors, the question is what is the "correct" valuation for bank stocks? Maybe those pre-crisis valuations were too high and current ratios reflect a more accurate pricing of risks. Or maybe the hangover from the financial crisis will subside in time, especially as banks continue to transition into less risky companies.  A return to average pre-2007 valuations could mean some nice returns for many banks even amid lackluster profit growth, which is what analysts are predicting for the most part, at least for the first half of 2016. 

It's likely possible that both are true -- that pre-crisis valuations are gone for good, but current valuations will prove to be unnaturally low in the long run.  But it's hard to imagine them breaking too far out of these depressed valuations anytime soon as presidential candidates try to one-up one another when it comes to how tough they'll be on banks. 

In meantime, the beauty of banks may lie in the eye of the bondholders. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net