In another display of nifty tentacle work, Goldman Sachs on Tuesday sold $1.3bn in 50-year bonds to retail investors — vastly beyond its original plans to sell just $250m worth.
While investors were (quite naturally) drawn to prospects for high, high yields at a time of rock-bottom interest rates, Goldman still managed to sell the bonds with a yield of 6.125 per cent — at the low end of estimates. On top of that, Goldman has landed a tidy hedge on inflation risk, as well as having diversified its investor base.
How so?
In a diplomatically-worded explanation, the FT cites investors saying Goldman “was able to get a lower rate by targeting retail investors who were less savvy in valuing an option that allows Goldman to call – or redeem – the bonds after five years.”
Others put it more bluntly. Mean Street’s Evan Newark, living up to his column’s name, noted in a post headlined “Goldman Sachs’ suckers bond trade“:
Are you still unsure whether we’re in the midst of a giant bond bubble? Well, Goldman Sachs sure isn’t. Today, it is selling $1.25 billion in 50-year bonds to retail buyers at a yield of 6.125%.
Do you believe, he adds, “that Goldman would be selling these bonds a week before the Fed meets if it thought interest rates were heading much lower?”
How many times, concluded Newark, must investors be warned? “Always judge Wall Street by its actions, not necessarily its words,” as he puts it.
And as ZeroHedge noted:
Is Goldman now trying to appeal to retail direct? Are pension and mutual funds tapped out, courtesy of endless redemptions and lack of cash for ponzi perpetuation purposes? Either way, if this is successful, and it will be in the broader dash for yield, look for most TBTF [too-big-to-fail] banks to start issuing 100 year bonds that will never be repaid.
Indeed, kicking along what could become a trend, Mexico early this month sold $1bn worth of 100-year debt with a yield of 6.1 per cent.
Funnily enough, Goldman co-managed the Mexican sale, although on that occasion it targeted institutional investors.
It should be noted that just as all those retail investors were piling into the long-term Goldman paper, the US Treasury this week sold its first negative interest-rate bonds this week. As the FT noted, the deal, together with Goldman’s 50-year bond sale, highlighted “the abnormal state of the credit markets” and the “difficult choices facing investors at a time when interest rates are at historical lows” and the Fed is moving towards more asset purchases aimed at staving off deflation. It adds:
Investors who think the Fed will succeed in its efforts – which would lead to higher inflation – accepted a yield of minus 0.55 per cent on $10bn of Treasury inflation protected securities, or Tips, which compensate holders if the consumer price index rises.
What to make of it all, then?
Well, PT Barnum had a point when he said “there’s a sucker born every minute”. But we’re now wondering whether the “sucker birthrate” has risen exponentially.
Related links:
In-depth: Goldman Sachs – FT.com
Peter Tasker: Emerging markets at risk from a gigantic bubble – FT
The loneliness of the long-distance inflationista – FT Alphaville
Portfolio 101 – Lesson 6: Bond basics - FT