By Bryan Keogh
May 19 (Bloomberg) -- Citigroup Inc. and JPMorgan Chase & Co. bonds sold last week without U.S. backing are surging as banks try to free themselves of government bailout programs.
Citigroup’s $2 billion of 8.5 percent notes due in 2019 gained 2.9 cents to 101.1 cents on the dollar at 3:53 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That narrowed the gap between the yield and benchmark rates by 53 basis points. The spread on JPMorgan’s 4.65 percent debt due in 2014 narrowed 19 basis points. A basis point is 0.01 percentage point.
U.S. financial companies have sold $20.9 billion in bonds without a Federal Deposit Insurance Corp. guarantee this month, according to data compiled by Bloomberg, as banks try to show regulators and holders of their debt and shares that they can independently finance themselves. Goldman Sachs Group Inc. and Morgan Stanley applied to refund a combined $45 billion in bailout funds, according to people familiar with the matter.
Participating in the government’s Troubled Asset Relief Program “became a little more of a painful experience,” JPMorgan Chief Executive Officer Jamie Dimon said today at the company’s annual shareholder meeting in New York.
Investors in the non-FDIC-backed debt may assume an implicit government guarantee of “too big to fail” that distorts investor behavior and creates “moral hazard,” Bank of America strategists led by Jeffrey Rosenberg said yesterday in a report.
Long-Term Strategies
“Longer-term debt investment in financial institutions requires one to consider the eventual removal of too big to fail,” Rosenberg in New York wrote in the report. “But investors may conclude that when that time comes they’ll be able to reduce those exposures or more likely by such time health will have returned to financials.”
Citigroup’s offering last week was its first without the FDIC’s backing since August, Bloomberg data show. The New York- based bank sold at least $34.4 billion with the guarantee.
The spread on the non-guaranteed notes issued on May 15 narrowed to 510 basis points today, compared with the 38.5 basis points spread on the bank’s three-year notes with FDIC backing.
Neel Kashkari, former administrator of the $700 billion U.S. bank-rescue program, said firms deemed too big to fail have an unfair advantage over smaller rivals because they can issue debt more cheaply. Kashkari said in a speech last night that some officials have discussed the possibility of a “debt tax” or “systemic tax” on those institutions.
Other Bonds Climb
Bonds sold by Morgan Stanley and Bank of America Corp. two weeks ago have also soared. Bank of America’s $3 billion of 7.375 percent notes due in 2014 jumped 2.5 cents to 101.9 cents on the dollar, driving the spread 58 basis points narrower to 480 basis points, Trace data show.
Morgan Stanley’s $2 billion of 7.3 percent bonds due in 2019 rallied 3.2 cents to 103 cents on the dollar, with the spread narrowing 37 basis points. Goldman Sachs’s $2 billion of 6 percent notes due in 2014 have gained 2.6 cents to 102.6 cents on the dollar since the April 29 sale, Trace data show. The spread narrowed 79 basis points.
