Bondholders are comfy with banks however, equity investors are less scared of these.
banking analyst Mike Mayo, who’s bullish on bank stocks, considers the bond market is suitable.
He notes yield spreads on bank debt are back to levels in February, although most bank stocks are deeply in the red this year with the
SPDR S&P Bank
exchange-traded fund (ticker: KBE) down 33% in 2020.
“Tighter spreads highlight the strength and resiliency that gives bondholders more confidence relative to equity investors that seem to be ignoring them,” Mayo wrote in a client note Thursday.
He points out that
Bank of America
bond spreads relative to Treasuries are now at 108 basis points, compared with 104 basis points at the end of February and 215 basis points March 31.
Each basis point is a hundredth of a percentage point. Other banks have seen a similar tightening in spreads with
(JPM) at 95 basis points, the same as Feb. 28 and less than half the 195 basis points at the end of March.
Banks now have the tightest spreads among major industries with the exception of technology.
He also notes that the average bank dividend yield less the 10-season Treasury is above 3%—the highest level in more than two decades—and that the price to book ratio of banks relative to the
is near an all-time low.
Warren Buffett’s Berkshire Hathaway
(BRK.A) purchased an additional $1.2 billion of Bank of America (BAC) stock recently, Mayo noted, and Berkshire disclosed another purchase of over $500 million of the bank’s stock late Thursday.
“Despite risks related to the 10-year Treasury and politics, there is value to be had in banks such as BAC and others,” Mayo writes.
Write to Andrew Bary in [email protected]