Wall Street banks set to unleash bond sales spree after earnings

Wall Street’s biggest banks are set to borrow much more than they usually do after reporting second-quarter earnings as the financial giants look to capitalize on attractive borrowing costs ahead of potential volatility later this year.

The six biggest US banks could borrow $21 billion to $24 billion after they post results, JPMorgan Chase & Co. credit analyst Kabir Caprihan wrote in a research note on Monday. The historical average for July is roughly $17 billion, but he expects it to be higher this time.

“July is on average the third heaviest month for global systemically important banks issuance after January and April and we don’t expect that to change in 2024,” wrote Caprihan.

JPMorgan, Citigroup Inc. and Wells Fargo & Co. are scheduled to kick off earnings Friday morning, followed by Goldman Sachs Group Inc. on Monday and Bank of America Corp. and Morgan Stanley on Tuesday. Analysts predict net interest income - the difference between what banks earn on their assets and what they pay on debts - will drop for a second straight quarter after a record surge last year.

Those six lenders are facing about $50 billion of redemption calls and maturities in second-half of 2024, according to Barclays analysts including Peter Troisi. They expect those bonds to be fully replaced with new senior debt. Barclays predicts the “Big Six” could borrow about $30 billion in the third quarter, most of which would be issued this month.

Bank of America and Goldman have been the least active this year. As a result, analysts expect them to be big issuers in the second half.

Barclays predicts those two banks will borrow about $15 billion each. Troisi and his team forecast another $10 billion from regional lenders and $15 billion from trust and credit-card banks for the rest of the year.

The backdrop for selling bonds is favorable following cooler-than-expected inflation in June, fueling hopes that the Federal Reserve can begin lowering interest rates this year. A perceived gauge of risk in the high-yield credit market eased to the lowest level since March following the inflation report.

Big lenders are also bracing for new capital rules that might require them to hold more debt at the holding-company level. The Federal Reserve is close to detailing a revamped plan for those rules, known as Basel III Endgame, Fed Chair Jerome Powell said Tuesday.

Bloomberg Intelligence analyst Arnold Kakuda expects big-bank bond issuance to rise, partly because of the anticipated rules. He forecasts issuance of $20 billion to $25 billion this month.

“Post-pandemic, the lenders have much bigger assets and larger debt footprints,” said Kakuda. “To keep their debt footprint, they will naturally be bigger issuers.”

Strong Demand

Banks’ borrowing spree is likely to be met with strong demand from investors flush with cash, including foreign firms and US pension plans. Bank bond spreads have rallied this year despite record corporate issuance in the first half, thanks in part to subdued issuance from some of the big lenders.

Banks have also been issuing more bank-level debt in recent months as deposits receded from their pandemic-era highs, helping keep a tight lid on the sector’s spreads. The average spread on a financial institution bond ended Wednesday at 93 basis points, just 3 basis points wider than the broader high-grade index, according to Bloomberg index data. That spread was 13 basis points wider at the start of the year.

Voya Investment Management is one of the investors interested in purchasing bank debt, according to Samuel Wilson, portfolio manager at the firm.

“We have recently reduced the larger banks in anticipation of supply and because spreads are generally full in the broader investment-grade market,” he said. “So that gives us room to add, especially if we see some underperformance or broader spread widening.”