As most of the independent brokerage firms have reported third quarter results, a sell-side analyst says investors should steer clear of bonds of Lehman Brothers (A2/A) and Bear Stearns (A2/A) now that the bull market for bonds appears to be over. Both firms dominate in the underwriting and secondary market trading of mortgage- and asset-backed securities. While both firms have reported consistently large earnings gains over the last two years, it will be hard for them to replicate that success as yields rise and investors shift to other asset classes, according to Vince Boberski, analyst at RBC Dain Rauscher. Boberski argues that investors should stick with the brokers that are likely to benefit from a strong equity market. Lehman's 4% notes of '13 were trading at 113 basis points over Treasuries last Tuesday, while Bear Stearns' 5.7% notes of '14 were 100 over the curve.
David Hendler, analyst at CreditSights, is less negative on the bond houses, arguing that they are sufficiently diversified to withstand a slight drop-off in trading and underwriting of fixed-income securities. He has turned a bit more positive on Goldman Sachs (Aa3/A+) and Morgan Stanley (Aa3/A+) than he had been, however. He argues that a pickup in high margin businesses such as equity and M&A will allow those firms to focus on their core business strategies and cut back on the risky business of proprietary trading. "Goldman hit a lot of home runs, but like Mark McGwire, pretty soon it'll be time to hang up the bat and focus on M&A," he says. Goldman's 4.75% notes of '13 were trading at 105 over treasuries last Tuesday, versus 107 for Morgan Stanley.