Fifth Third Investment Advisors has lightened up on its holdings of Bank of America and Citigroup Inc. Spreads have tightened dramatically in the names, and new issuance may cause some widening, argues Mitch Stapley, portfolio manager at the Grand Rapids, Mich. money manager.
Citi's 3.5% notes of '08 (Aa1/AA-)were trading at 53 basis points over Treasuries last Wednesday afternoon--15 basis points tighter than where they traded a month earlier. B of A's 3.875% (Aa2/A+) notes of '08 were at 41, representing 19 basis points of tightening over the same time frame.
John Otis, analyst at Deutsche Bank, still sees arguments for holding on to the paper, however, particularly for those who want to remain invested in the sector. He still sees some room for upside if the economy grows by 3% and interest rates climb slightly. Otis does not see much risk of widening, arguing that issuance will not be unusually robust. He also notes that the "money center" banks trade only a few basis points tighter than regional names, as there is a strong bid for diversification. For example, a recent $250 million offering from First Tennessee, the 4.625% notes of '13 (A2/A), priced at 72 basis points over Treasuries, just four basis points tighter than the higher rated and more liquid $1 billion issue from B of A, the 4.875% notes of '13 (Aa2/A+).
