Regional-Bank Debt Is a Bargain to Buyers Betting Worst is Over

Money managers including Invesco Ltd. and Loop Capital Asset Management are bullish on regional-bank bonds, wagering that the debt will perform better than the broader market as fears about funding costs settle down.

Invesco has been loading up on regional-bank bonds during the second half of the year to take advantage of “some really attractive” new issues, said Matt Brill, head of North America investment-grade credit at the firm. Loop Capital has been combing the secondary market for bargains, expecting most lenders to pull through if benchmark rates stabilize and the economy continues to grow, said Scott Kimball, chief investment officer at the firm.

A string of regional-bank failures earlier this year stoked concerns about lenders, who now face greater regulatory scrutiny, in addition to losses tied to commercial real estate after interest rates have risen. But deposit levels at the banks, which had been shrinking, are showing signs of stabilizing. And investors in recent weeks have grown more hopeful that the Federal Reserve will start cutting rates earlier next year, a hope that Chair Jerome Powell pushed back against Friday. Cutting rates could cut funding costs for the banks, reducing some of the pressure on their earnings.

For investors who think regional banks won’t face as hard of a time as they did this year, it’s a good time to buy the sector’s debt. Spreads for financial institution bonds have tightened around 65 basis points since the banking turmoil in March — signaling recovery — but they’re still nearly 20 basis points wider than that of the broader high-grade index.