The following commentary is by Evan Newmark - The Wall Street Journal
Mean Street: Goldman Sachs' Suckers Bond TradeRead the article here
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 that Goldman would be selling these bonds a week before the Fed meets if it thought interest rates were heading much lower?
If you think so, I happen to have some fresh 100-year Mexican bonds to sell you -– and those have about the same yield as the Goldman paper.
How many times must investors be warned? Always judge Wall Street by its actions, not necessarily its words.
Remember Countrywide CEO Angelo Mozilo?
He had a nasty habit of talking up the U.S. housing market all the while he was unloading millions of Countrywide shares. A week and a half ago, the SEC forced Mozilo to pay $68 million for his habit.
Of course, there’s nothing dishonest about Goldman’s bond offering. It is a seller of 6% paper and there are plenty of yield-hungry buyers who still see the coming of the next Great Depression.
Indeed, just earlier this month we had Goldman economist supremo Jan Hatzius painting a pretty dire picture of the U.S. economy. Prospects for the economy were either “fairly bad” or “very bad.” Hatzius ended up putting 25-30% odds on a double-dip recession.
But Hatzius’ words are very different from Goldman’s actions. If Goldman CEO Lloyd Blankfein actually bought into Hatzius’ downbeat disinflationary scenario, do you think Goldman would be issuing these bonds?
Of course not. He would wait until the 10-year Treasury fell further to 2% or lower. But Blankfein’s not waiting. He’s a trader and he smells a good trade.
Why anyone would want to be on the other side of a Blankfein trade is a mystery to me. But today’s bond buyers don’t care about a seller’s motivations. They don’t care about inflation risk.
And they don’t care about terms. The Goldman bonds are callable after just five years. Goldman can buy them back at its choosing.
No, today’s bond suckers care only for yield. And that’s what the Goldman 6.125% yielding bonds have — even if investors are taking 50 years of risk in return for that yield.
Demand for the offering was so great that Goldman quintupled its size.
And you can be sure that the 50-year bond will be end up a huge success. At least for Goldman Sachs. Those who end up owning the bonds may find otherwise.