US BANKS are taking advantage of improving earnings and growing investor demand to raise billions of dollars in debt at historically low interest rates, a move that could boost the sector’s profits in coming years.

The burst of fundraising in the US is in stark contrast to Europe, where banks have struggled to issue debt as the euro-zone crisis and worries about the financial industry have undermined market confidence.

The cheap finance locked in by big institutions like JPMorgan Chase, US Bancorp, Goldman Sachs and Morgan Stanley in recent days marks a remarkable comeback for a sector that was shunned by investors during the financial crisis.

Less than two years after the government had to intervene to ease the credit crunch, US banks sold more than €5.3 billion in debt last week, the largest weekly total since September 2009.

US Bancorp, a Minneapolis-based lender, raised $1 billion in five-year bonds at an interest rate of 2.45 per cent – one of the lowest ever paid by a bank. Lower funding costs boost profits because they increase the margins earned by banks on their loans to consumers, companies and investors.

Wall Street executives say recent debt issues were triggered by “reverse inquiries” – informal approaches by fund managers seeking to raise their exposure to a sector they had avoided since the crisis. “There is a bit of a food-fight among investors to get hold of paper from US banks,” an executive at a big bank said.

With US treasury yields at record lows, investors seek alternatives that offer higher returns. Expectations that the Federal Reserve will keep rates at near zero have further raised demand for bonds, as a low-interest, low-growth environment is best for such investments.

Recent earnings and the passage of financial rules also contributed to the surge in debt issuance. Goldman, Morgan Stanley and JPMorgan each issued $3 billion bonds this month. – Copyright The Financial TimesLimited 2010