(Bloomberg) – Morgan Stanley became the first major bank on Wall Street to strike a new bond deal after reporting its third quarter results, paving the way for other banks to follow.
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The lender borrowed $ 5 billion on Thursday in a two-piece bond sale, according to a person with knowledge of the matter. The longest maturity, an 11-year portion, returns 1 percentage point above T-bills, after initial talks of around 1.15 percentage points, said the person, who asked not to be identified because the details are private.
A barrage of US bank gains could herald a wave of financial sector bond issuance before borrowing costs rise too much. Benchmark 10-year Treasury yields hit their highest level since mid-year this week. The bond deal comes as risk premiums on corporate debt remain low, increasing attractiveness for issuers.
Morgan Stanley investment bankers posted their best quarter ever, boosted by deals. The division grossed $ 2.85 billion in the third quarter, a 67% jump that topped analyst estimates and helped boost company-wide profitability.
Morgan Stanley and Goldman Sachs Group Inc. see an increase in blue chip brokerage business after the implosion of Archegos Capital Management and are likely to issue new debt to fund this part of their business, according to Arnold Kakuda, analyst at Bloomberg Intelligence.
“I see the sale of bonds like Morgan Stanley helping fund their core business,” Kakuda said in a telephone interview Thursday. “They have tight spreads and his businesses are doing pretty well.”
Bill Hwang’s Archegos collapsed in March as some of its more than $ 100 billion positions fell, triggering margin calls from banks, which then gave up their holdings. The ensuing rout caused lenders to lose more than $ 10 billion and forced internal investigations and the departure of senior executives. Hwang’s brokers included Credit Suisse Group AG, Nomura Holdings Inc., Goldman Sachs and Morgan Stanley.
Bigger banks like JPMorgan Chase & Co. and Bank of America Corp. have issued more debt since the Federal Reserve’s additional leverage ratio relief expired in late March to increase their liquidity to support inflated balance sheets, Kakuda said.
“I wouldn’t be surprised to see JPMorgan issue senior debt and they can also create subordinate or preferred notes,” he added. “Citi could close a bond transaction until the end of the year, while Bank of America could start to slow down in the future. Wells Fargo likely won’t be broadcasting the rest of the year.
Financial sector debt spreads tightened on Thursday, punctuating a widespread recovery in credit. High-quality senior financial sector spot bond spreads tightened 1.2 basis points as of 4:41 p.m. in New York City, according to data compiled by Bloomberg.
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