Banks exploit falling rates to sell bonds Bank of America, Morgan Stanley and AIG have sold $5.3bn of bonds, taking advantage of falling interest rates for bank debt following the Federal Reserve's recent stress test results. Market indicators of investors" perception of the riskiness of bank debt have fallen after the Fed said that nearly all of the US's biggest banks, including BofA and Morgan Stanley, could survive a severe downturn with their planned levels of capital. Prices for insuring credits for Goldman Sachs, JPMorgan Chase, Wells Fargo and BofA hit their lowest levels of the year on Monday, according to Markit. The KBW large-cap bank stock index also ended at its highest level since last May. This underlines an uptick in investor demand for bank bonds, which are still seen as riskier than other corporate issues, but also offer relatively high yield as demand for bonds by investors remains strong. "The stress tests provide some comfort for the investor, and banks now have an idea of what they want their capital structure to look like with the blessings of the regulators," said Craig Elder, fixed-income strategist at Baird. BofA on Monday sold $1.25bn in five-year notes at 275 basis points higher than benchmark Treasury yields. By contrast, BofA sold 10-year notes at a spread of 325bp to Treasury last month. The bank's shares touched $10 for the first time since August on Monday, and its 5-year credit protection costs fell to the lowest since August, at 194bp, or $194,000 annually per $10m in debt. Morgan Stanley, whose 5-year CDS fell to 276bp, sold $2bn worth of five-year notes at a spread of 360bp to Treasuries. The pricing highlighted the strong demand, as it was a 50bp improvement over market prices for similar maturity swaps on Friday, though Morgan Stanley CDS are still the highest of the large banks, according to Markit. Separately, AIG, the insurer bailed-out by the US government in 2008, also sold $2bn worth of notes on Monday, including 3-year notes at a spread of 245bp to Treasuries and five-year notes at a spread of 265bp. The proceeds will be used to buyout the US Treasury's preferred interests in a special purpose vehicle owning shares in AIA, AIG's former Asia subsidiary which was spun out to the public in 2010, the company said in a statement. US bank bond issuance has been light so far this year, but it has been picking up as bank stocks rise, and the price of credit insurance on bank debts falls. The sales on Monday follow issuance earlier this year by JPMorgan, Wells Fargo, Citigroup and Goldman Sachs. US banks are also under pressure to raise debt to replace more than $200bn of government-backed funding that is maturing in 2012 and to replace other funding vehicles ahead of rising capital requirements. However, bank debts are still seen as relatively risky. With BofA and Morgan Stanley, the average spread on similarly rated corporate debt is 202bp, according to Bank of America Merrill Lynch index figures. "Rapidly rising underlying yields [are dovetailing] with a steady tightening in credit-spread levels ... underscoring the urgency for borrowers to lock in funds for a broad spectrum of purposes," said analysts at S&P's LCD unit.