In 2011, among the bonds of the largest too-big-to-fail institutions, Bank of America’s bonds took perhaps the worst beating before largely recovering late in the year and during the early part of 2012. With any luck, the same will now happen to another too-big-to-fail institution, Citigroup. It is true that Citigroup’s bonds have rallied along with Bank of America’s and other corporate bonds, as spreads have narrowed in recent months. However, with the recent announcement that Citigroup failed the Fed’s stress test, investors interested in purchasing the bonds of too-big-to fail banks should make their list of Citigroup CUSIPs to buy.
It may seem counterintuitive to want to make a list of bonds to buy from a financial institution that just failed the Fed’s stress test. I certainly would not advocate doing the same with the other three institutions failing the test, Met Life, Ally Financial, and Suntrust. However, if you believe it is absurd to think that one of the largest too-big-to-fail banks in the world could ever be allowed to default on its debt, especially its senior debt, then any relative underperformance to its peers over the coming weeks should be viewed as an opportunity.
After news broke of Citigroup’s stress test failure, the company’s stock quickly tumbled nearly 7% during the afterhours trading session on Tuesday before recovering some of its losses. A couple of Citi’s subordinated bonds showed weakness after the announcement, although I would suspect the true impact of failing the stress test won’t be felt until the next market-wide pullback occurs, resulting from fears about the economy. At that time, whenever it may be, traders will sell the bonds of banking institutions perceived to be weaker, and we will see just how much investors really care about the stress test results. During the last big pullback in bank bonds, Bank of America was the too-big-to-fail institution with bonds offering the best deals in town. At the moment, Citigroup looks poised to become the company among the largest too-big-to-fails with the most attractive bonds during the next market-wide sell-off.
When thinking about the right time to buy-the-dip in Citigroup bonds, if you are a mark-to-market bond investor or a bond trader, you will want to be more patient than the held-to-maturity investor looking to pick up above average yield in this zero-interest-rate environment. The investor holding bonds to maturity should be looking to buy any immediate moderate weakness resulting from the outcome of the stress test. Bond traders should still consider waiting for the next time spreads widen market-wide and then focus on Citigroup bonds.
For now, be patient, do your homework on whether senior or subordinated debt is the place you want to be, pick the CUSIPs you want to buy, and be ready to pounce on the next pullback. If you are looking for a place to start your research, here are some CUSIPs to keep in mind: 172967FT3, 172967CT6, 172967BU4, 172967DQ1, 172967CQ2, 172967EH0.
Disclosure: I am long CUSIPs 172967FT3 and 172967CT6.
I am an investor/trader with nearly nine years experience in the financial world. I have experience investing in and trading equities, options, and a variety of fixed income and alternative investment products. I also write for SeekingAlpha.com.
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