Bloomberg News

Pimco Says U.S. Banks ‘Bondholder’s Dream’ on Capital Rules

June 30, 2011

(Updates with television interview in fifth paragraph.)

June 30 (Bloomberg) -- Pacific Investment Management Co. is wagering that U.S. banks will withstand the Greek deficit crisis with their bonds returning more than other debt after their worst monthly performance this year.

“U.S. banks are in a stronger position to absorb deterioration in the macroeconomic environment,” Mark Kiesel, global head of corporate bond portfolios at Pimco, wrote today on the firm’s website. “Bank and financial credit spreads remain attractive.”

Investors have turned away from financial debt as Greece’s struggle to avoid default threatened its creditors, creating buying opportunities, said Kiesel, who’s based in Newport Beach, California. Pimco, manager of the world’s largest bond fund, favors the bonds of JPMorgan Chase & Co. and Goldman Sachs Group Inc., as regulators require the biggest banks to hold more assets to back their debt, he said.

“That’s a bondholder’s dream,” Kiesel said yesterday in a telephone interview. “You’re basically having the incentives for these companies aligned with yours.”

While JPMorgan and Goldman Sachs are “clear winners,” Bank of America Corp. may need to sell part of the firm’s $21 billion stake in China Construction Bank Corp. to comply with the so-called Basel III rules, Kiesel told Carol Massar and Matt Miller on Bloomberg Television’s “Street Smart” today.

Bank Bonds Fall

“Bank of America, of the major banks, is in the least best position from a capital standpoint,” Kiesel said. “JPMorgan and Goldman can literally get to Basel III by the end of 2012.”

Bank bonds lost 1 percent this month, the biggest decline since November, according to Bank of America Merrill Lynch index data. The extra yield investors demand to hold the debt jumped 23 basis points since the end of May to 212 basis points, or 2.12 percentage points. Spreads on industrial company debt expanded 6 basis points to 144 basis points during the period. Strategists at JPMorgan, whose fixed-income research group ranked first in Institutional Investor magazine’s latest survey of U.S. money managers, changed their recommendation on U.S. banks to “neutral” from “overweight” this month.

“The long bank short industrial trade is a crowded one and has not performed well as risk sentiment has turned,” strategists led by Eric Beinstein wrote in a June 17 report.

TCW Group

U.S. banks aren’t “in the firing line” of a Greek default and their bonds will perform well, according to Tad Rivelle, head of fixed-income investment at Los Angeles-based TCW Group Inc., which oversees about $120 billion.

“We continue to be fans of the systemically critical U.S. financials,” Rivelle said yesterday in a telephone interview.

Global regulators agreed last weekend that banks deemed too big to fail must hold as much as 2.5 percentage points in additional capital as part of efforts to prevent another financial crisis. The buffers will range from 1 percentage point to 2.5 percentage points, the Basel Committee on Banking Supervision said in a June 25 statement.

The requirements go beyond capital rules for internationally active lenders that were published by the Basel committee last year. Those measures, known as Basel III, require banks to hold core capital equal to 7 percent of their risk- weighted assets.

--With assistance from Will Robinson, Sapna Maheshwari, Carol Massar and Matt Miller in New York. Editors: Pierre Paulden, Richard Bedard

To contact the reporter on this story: Zeke Faux in New York at

To contact the editor responsible for this story: Alan Goldstein at

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