The corporate bond market is signaling trouble ahead for those U.S. regional banks that are facing rising loan losses from commercial real estate.

U.S. bank bonds have rallied broadly since March, when the market was awash with fears for the financial system.

But while investors are increasingly confident that big banks can survive an extended downturn, they are worried about the next tide of toxic loans that threatens to inundate an already floundering economy.

Bonds of some U.S. regional banks with big commercial real estate exposure reflect this concern, analysts said. For example, the bonds of Birmingham, Alabama-based Regions Financial Corp (RF.N) have dropped about 17 percent in price since late March.

The regional banks have two issues, said Tanya Azarchs, a bank credit rating analyst with Standard & Poor's in New York. Commercial property loans are an escalating threat to banks, while homebuilders' loans turned bad first, she noted.

That wave of problems hit earlier obviously because the housing markets went into the tank a couple of years ago, Azarchs said.

This week's data suggested a bottom in the housing market is in sight, with a report on Tuesday showing U.S. home prices rose in May for the first time in three years.

Yet analysts fear that much of the drama in the commercial real estate market has yet to unfold.

U.S. commercial real estate prices, which have fallen about 35 percent from their peak in October 2007, are a major driver of banks' loan losses.

Bank loans for commercial real estate projects such as offices had held up quite well until now, but the cracks are starting to appear, said Azarchs, who expects to see banks take more write-downs from commercial real estate for about two years.

About $2.2 trillion of U.S. commercial properties bought or refinanced since early 2004 have fallen below the price at which they changed hands, according to a report by Real Capital Analytics, a research firm based in New York.

SOUTHERN EXPOSURE

Among the regional U.S. banks most exposed to this next slide in brick-and-mortar holdings, analysts said, are three major names in the southeastern United States -- Regions Financial (RF.N), Synovus Financial Corp (SNV.N) and Colonial BancGroup Inc (CNB.N).

Last week, Regions said it had a much bigger-than-expected second-quarter loss due to mounting losses on commercial and real estate loans and set aside $912 million for credit losses -- triple the year-earlier amount.

And Synovus, based in Columbus, Georgia, reported a second-quarter net loss of $586.9 million, hurt by higher loan-loss provisions.