JPMorgan, Wells Fargo Lure Risk-Averse With ‘Almost’ Treasuries

By Alexis Leondis

Jan. 15 (Bloomberg) -- Investors seeking higher yields than U.S. Treasuries with comparable risk should consider bank bonds backed by the Federal Deposit Insurance Corp., said Gary Pollack, head of fixed-income trading and research at Deutsche Bank AG.

American Express Co. issued FDIC-backed bonds in December with three-year maturities yielding 2.501 percent and JPMorgan Chase & Co.’s three-year notes are yielding 1.821, according to data compiled by Bloomberg. That compares with yields of 1.027 percent for three-year Treasury notes.

“We’re buying these for our clients because they’re ‘almost’ Treasuries with better yields, said Pollack, who helps oversee $12 billion at Deutsche Bank AG’s Private Wealth Management unit in New York.

At least sixteen banks and FDIC-approved financing units, including San Francisco-based Wells Fargo & Co., New York-based JPMorgan, Goldman Sachs Group Inc., Citigroup Inc. and Stamford, Connecticut-based General Electric Capital Corp., have raised $114.7 billion through the FDIC’s Temporary Liquidity Guarantee Program, based on Bloomberg data. The program, announced in October to help thaw the credit markets, assures investors they will get a timely payment of principal and interest should an issuer go bankrupt.

The FDIC protects each bank depositor up to $250,000, a limit which is set to drop to $100,000 at the end of this year. FDIC-backed bonds allow investors to maintain the federal guarantee above $250,000, according to Jonathan Krasney, a certified financial planner at Mendham, New Jersey-based Krasney Financial, LLC.

Bank customers can obtain more FDIC coverage by opening accounts in different ownership categories, such as joint accounts, individual retirement accounts and revocable trusts.

Higher Yields

While FDIC-backed bank bonds may offer higher yields than Treasuries, certificates of deposit provide better yields than both bonds, said Debra Brede, a wealth manager in Needham, Massachusetts. “I like to diversify, but there’s no reason to include Treasuries or FDIC-backed bank bonds in your portfolio right now -- you can get the same government backing with CDs,” Brede said.

Three-year GMAC bank CDs are paying 3.34 percent with an annual yield of 3.4 percent, based on Bankrate.com data.

The benefit of FDIC-backed bonds is they can be traded without penalty, unlike CDs, said William Larkin, a fixed-income portfolio manager at Cabot Money Management in Salem, Massachusetts, which manages $500 million in assets. Cashing out a CD that has a term of at least two years before its maturity may incur a penalty of six months’ interest, according to Bankrate.

No Minimum

The FDIC-backed bank bonds are generally issued in $100,000 minimums, said Pollack of Deutsche Bank, although the FDIC hasn’t mandated a minimum investment amount. The minimum purchase amount for Treasury bills and notes is $100.

Retail investors can access FDIC-backed bank bonds with bond funds, such as Vanguard’s Total Bond Market Index Funds. The securities are in the funds’ target benchmarks and are considered government-guaranteed agencies in the index, said John Woerth, spokesman for the Valley Forge, Pennsylvania-based company.

Fidelity Investments can offer customers the opportunity to buy FDIC-insured bank bonds on the secondary market if they can be located, said Steve Austin, a spokesman for the Boston-based mutual fund manager. TD Ameritrade Holding Corp., the third- biggest U.S. online brokerage by assets, is also offering FDIC- insured bank bonds without minimums and is seeing slight retail interest, said James Frawley, a spokesman for the company, based in Omaha, Nebraska.

Three-Year Limit

The FDIC will insure bank bonds issued on or before June 30, 2009, and coverage is limited to June 30, 2012, even if the bond’s maturity exceeds that date, said David Barr, a spokesman for the Washington-based organization.

“It wouldn’t surprise me at all to see a June 2009 extension,” said Eric Jacobson, a senior analyst at Morningstar. Insuring bank bonds past June depends on banking and consumer confidence in six months, said Jacobson, who is based in Chicago.

“Maybe the government has bitten off more than it can chew,” said Larkin of Cabot Money Management. “We may look back and say what were we thinking -- FDIC-insured paper?”

To contact the reporter on this story: Alexis Leondis in New York aleondis@bloomberg.net.