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Tags: economy | goldman | sachs | yield | bond | debt | market

Goldman Debt Sale Shows Inflation Concern Wanes

Sunday, 23 January 2011 07:49 PM EST

Goldman Sachs Group Inc.’s offering of 30-year bonds, its first in more than three years, signals waning concern among investors that inflation is accelerating.

The fifth-biggest U.S. bank by assets received $9 billion in orders for its $2.5 billion of debentures sold on Jan. 21, according to Mizuho Securities USA. The 6.25 percent senior bonds yield 170 basis points more than similar-maturity Treasuries, at the low end of a 5-basis-point range marketed by the New York-based firm, data compiled by Bloomberg show.

Economists are lowering forecasts for consumer price rises next year, with the median estimate declining to 1.9 percent this month from 2 percent in December, according to a Bloomberg survey of 55 economists. The record $13 billion auction of 10- year Treasury Inflation-Protected Securities on Jan. 20 attracted lower-than-average demand and the difference between yields on 10-year notes and TIPS narrowed the most since May.

“People aren’t too worried about inflation,” said Anthony Valeri, market strategist with LPL Financial Corp. in San Diego, which oversees $293 billion. “Goldman was noticing there’s some demand here and they could get that deal done.”

Thirty-year Treasuries yield 3.07 percentage points more than the consumer price index, above the average of 2.38 percentage points since the start of 2000. Goldman Sachs economists predict a 0.6 percent increase in personal consumption expenditures this year, compared with the median 1.05 percent of 59 economists surveyed by Bloomberg.

‘Satiate’ Demand

The bank’s last benchmark-sized offering of 30-year dollar- denominated bonds was in September 2007, Bloomberg data show. In that sale, Goldman Sachs issued $2.5 billion of 6.75 percent debt at a 190 basis-point spread, Bloomberg data show. Benchmark sales are typically at least $500 million.

“With Goldman Sachs doing a 30-year, it allows them to satiate some of the demand in the 30-year part of the curve and gets them close to all the buyers that are knocking on their door for bonds with duration,” said Timothy Cox, an executive director of debt capital markets at Mizuho in New York.

Elsewhere in credit markets, spreads on global company bonds narrowed for a third week, shrinking to the lowest since May. Securities issued by Petroleo Brasileiro SA in Brazil’s largest corporate debt offering rose on their first day of trading as issuance worldwide fell. Leveraged loan prices increased, reaching the highest level in more than three years during the period.

Yields on company debt from the U.S. to Europe and Asia narrowed 4 basis points relative to government bonds to 162 basis points, or 1.62 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Spreads, which have tightened 7 basis points this month, are down from 177 on Nov. 30 and at the lowest since reaching 158 on May 5.

Petrobras Bond Sale

Yields jumped to an average 3.98 percent from 3.93 percent on Jan. 14. The Barclays Capital Global Aggregate Corporate Index of bonds has gained 0.08 percent this month.

In emerging markets, relative yields widened 4 basis points to 239 basis points, according to JPMorgan Chase & Co. index data. During the past three months the index has ranged from a high of 279 on Nov. 30 to as low as 217 on Jan. 5.

Petrobras, Brazil’s state-controlled energy producer, sold $6 billion of bonds as worldwide issuance declined to $73.3 billion for the week, from $111 billion in the prior period, according to data compiled by Bloomberg.

The Rio de Janeiro-based company’s $2.5 billion of 5.375 percent notes due in 2021 rose on the first day of trading, climbing 1.52 cent from the issue price on Jan. 20 to 101.32 cents on the dollar, according to Trace, the bond price- reporting system of the Financial Industry Regulatory Authority.

Loans Climb

The cost of protecting corporate securities from default in the U.S. was little changed. Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 0.3 basis point to 83.6 basis points, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell for a second week, declining 4.6 to 100.

Credit-default swaps typically rise as investor confidence deteriorates and fall as it improves. Contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a swap protecting $10 million of debt.

The Standard & Poor’s/LSTA US Leveraged Loan 100 Index increased 0.3 cent for the week to 95.54 cents on the dollar after reaching 95.59 on Jan. 19, the highest since November 2007. The index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has gained 1.98 percent this month. Speculative-grade debt is rated less than Baa3 by Moody’s Investors Service and BBB- by S&P.

‘Bumping Along’

Goldman Sachs may have offered the long-maturity debt to get ahead of an increase in borrowing costs, said LPL’s Valeri. Yields on 30-year Treasuries climbed last week to 4.61 percent, the highest since April.

“They’re probably saying, ‘Look, this 30-year’s still not performing well, it’s bumping along in terms of price, let’s get this debt done now before interest rates get higher,’” Valeri said. “As an investor you’re being compensated more to stand out on the yield curve. You’re getting more yield for extending the maturity.”

Michael DuVally, a spokesman for Goldman Sachs, said the firm doesn’t comment on its own deals.

Including Goldman Sachs’s offering, companies have issued $5.32 billion of 30-year debt in dollars this month, up from $1.5 billion of sales in December, Bloomberg data show. That compares with an $8.86 billion average in the first 11 months of 2010.

‘Buckets’ to Fill

“A lot of investors have buckets they need to fill up within their portfolios, and there’s a need for 30-year paper,” said Rajeev Sharma, a money manager at First Investors Management in New York, who helps oversee $1.5 billion of investment-grade credit. “It’s very hard to get 30-years out there.”

The U.S. auction of 10-year TIPS on Jan. 20 drew a yield of 1.17 percent, compared with an average forecast of 1.108 percent in a Bloomberg survey of nine of the Federal Reserve’s 18 primary dealers, who are obligated to bid in U.S. debt auctions. The yield at the last auction of the maturity on Nov. 4 was the lowest ever, 0.409 percent.

The sale was the largest 10-year TIPS offering since the government began selling inflation-indexed debt in 1997.

The bid-to-cover ratio, which gauges demand by comparing the amount offered with the amount sold, was 2.37, the lowest since April 2009. It was 2.91 at the last sale in November and averaged 2.73 at the past 10 offerings.

Negative Return

“Inflation expectations implied by TIPS are down this week,” Valeri said. “That’s probably motivating investors to feel more comfortable with long-term debt.”

Yields on 10-year TIPS show bondholders expect the consumer price index to increase 2.19 percentage points a year on average over the life of the debt. The CPI rate rose 1.5 percent in 2010 and is forecast to climb 1.7 percent this year, based on a Bloomberg survey of more than 60 economists.

The so-called breakeven rate on TIPS reached 2.41 on Jan. 5 and is up from 1.51 percent in August amid concern that the $600 billion of cash the Federal Reserve will print to buy Treasuries would cause faster inflation.

U.S. corporate bonds due in 15 years or more are poised for a fifth consecutive month of declines, losing 1.23 percent in January, the worst-performing class in the Bank of America Merrill Lynch indexes.

JPMorgan Sale

The last benchmark offering of 30-year debt by a U.S. bank was in October, when New York-based JPMorgan sold $1.25 billion of bonds, Bloomberg data show. The 5.5 percent securities paid a spread of 165 basis points. Goldman Sachs sold $1.3 billion of 50-year debt on Oct. 26, Bloomberg data show. The bonds were offered in $25 denominations and can’t be called, or redeemed, for five years, the bank said in a regulatory filing.

Goldman Sachs “is saying, ‘Hey, listen, the market wants this, let’s give it to them because if we do this a year from now, there’s a good chance rates could be up 100 basis points,’” Mizuho’s Cox said. “If you believe we’re in the beginning of a recovery, then you would certainly anticipate the 30-year to move up in yield.”

© Copyright 2024 Bloomberg News. All rights reserved.

Goldman Sachs Group Inc. s offering of 30-year bonds, its first in more than three years, signals waning concern among investors that inflation is accelerating.The fifth-biggest U.S. bank by assets received $9 billion in orders for its $2.5 billion of debentures sold on...
Sunday, 23 January 2011 07:49 PM
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