Spreads Soar on Bank Debt Securities

Bank debt yields are trading at 242 basis points more than benchmark government securities, according to Bank of America Merrill Lynch’s Global Broad Market Financial Index. 

That’s approaching the 259 basis-point spread on bonds rated as much as five levels lower than the index’s average Moody’s Investors Service grade of A1. 

The difference was as slim as 11 basis points this month, down from 177 basis points at the start of 2009.

Investors are marking down bank bonds on concern Europe’s sovereign debt crisis may reduce the quality of lenders’ collateral, while regulatory efforts to prevent a repeat of the seizure in credit markets crimps their profits. Banks may have a capital deficit of more than $1.5 trillion by the end of 2011 and some may require state support, according to Independent Credit View, a Swiss rating company, reports Bloomberg.