US banks piled back into the dollar bond market this week to raise new debt, taking advantage of tighter spreads just weeks after printing large post-earnings deals.
Market participants said they expected issuance from banks to remain elevated as they strive to meet Total Loss Absorbing Capacity needs and replace old debt before interest rates rise.
James Strecker, a bank analyst at Wells Fargo, said banks were making the most of strong conditions now.
"Banks like to get a healthy chunk of their full-year funding done in Q1," he said. "Last year that got knocked back a bit with the market volatility in January and February."
J. P Morgan and Morgan Stanley sold new deals on Tuesday - a US $2bn 31-year non-call 30 deal and a US $3bn three-year non-call two FRN, respectively.
That followed a large US $3bn tap from Goldman Sachs on Monday, increasing the size of the US $5bn issue it sold after reporting earnings in January.
The three had already issued a total of US $14.75bn in new debt after reporting earnings in January.
Because many of them still have debt to raise to meet regulatory requirements, banks will keep coming back to the bond market to take advantage of low interest rates, said Pri de Silva, senior analyst at CreditSights.
CreditSights expects the largest eight US banks to issue up to US $185bn of senior and subordinated debt in 2017. They have issued US $44.75bn so far this year, according to IFR data.
A banker close to Morgan Stanley's deal said it was driven by reverse inquiry and pointed out that the bank's recently issued bonds had tightened 10bp-15bp since pricing.
"Prices have gotten better for borrowers and there continues to be a lot of demand," said the banker.
J. P Morgan's deal from January had tightened 5bp since pricing, while Goldman's was 10bp-12bp tighter, according to MarketAxess.
Average high-grade bank spreads finally began to follow suit this week, closing at 116bp on Tuesday, 4bp tighter then they were at the start of the year.
Market participants remain upbeat on the sector despite the expectations of higher supply.
"Once we get past this wave of Q1 supply and the calendar moderates a bit, it should be supportive for spread tightening," said Strecker.
"But the buyside has to truly get comfortable that we're not just going to see a bunch more deals."
The regulatory backdrop is also looking more positive for banks.
The resignation last Friday of Daniel Tarullo, the Federal Reserve governor who was a leader of post-crisis reforms and a driving force behind TLAC, drew cheers from bankers who are hopeful that regulation will be dialed back.
But investors said that while his departure could lead to looser regulation, it was unlikely to reduce the amount of extra debt banks have to raise by 2019 when TLAC comes into effect.
"The quicker axe to be pulled will be on regulations like the Volcker rule," said Bill Hines, a portfolio manager at Aberdeen Asset Management in Philadelphia.
An over-zealous relaxing of capital standards could actually be negative for bank debt spreads, said Strecker.
"There's a certain degree of concern among creditors about regulatory relief going too far and that being a negative for bank credit spreads," he said.