Citi's Bond Issuance Highlights Risk in Financials

Finally, this highlights an important risk of owning bank and brokerage bonds, and the opportunity that new issues offer. Under normal conditions, banks and brokers are routine issuers of new debt. The fact that accessing the bond market is currently so expensive is keeping issuers on the sidelines, but in fact, that's pent up demand for debt financing. As soon as conditions improve, expect a flood of new bond issues, all of which will come at a substantial concession to secondary trading levels.

But it's common for the initial trading of the new debt issue to be tighter than the initial offer spread. The idea is that while Citigroup needed to pay a significant yield premium to clear $3 billion in bonds, once that initial supply has cleared, trading in the issue should resume at close to pre-supply levels. Indeed, the new Citi bond is trading today about 10bps tighter than its original spread.

So even if you believe we're already past the bottom for financials, tread carefully into financial bonds, and wait for new issues to make your allocation.

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At the time of publication, Graff had no positions in the stocks mentioned, although positions may change at any time.

Tom Graff is a Managing Director of Cavanaugh Capital Management, a registered investment advisor in Baltimore Maryland. The opinions expressed here are Graff's own and in no way are the statements of Cavanaugh Capital Management, and may or may not reflect the strategies being pursued for clients of Cavanaugh Capital Management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Graff appreciates your feedback; click here to send him an email.