By John Detrixhe and Bryan Keogh
May 6 (Bloomberg) -- Goldman Sachs Group Inc. bond yields show the firm’s credit is more hazardous than Citigroup Inc.’s for the first time since February 2009 as speculation grows legal and regulatory risks will depress its revenue.
Debt from the most profitable Wall Street firm yielded 2.73 percentage points more than Treasuries on average as of May 4, according to Bank of America Merrill Lynch indexes. That compares with a spread of 2.29 percentage points for Citigroup, which got a $45 billion bailout in 2008 and repaid $20 billion in December. At the end of March, Citigroup spreads were 0.45 percentage point wider than Goldman Sachs’s.
Fitch Ratings revised Goldman Sachs’s A+ ranking outlook to “negative” from “stable” yesterday on concern its reputation will be tarnished. Wider spreads mean the New York-based investment bank, with $180.4 billion of unsecured long-term borrowing, may pay an extra $7.6 million in annual interest on every billion of debt it issues.
“With Goldman and the investigation going on, you have to build a bit more risk premium into that,” said Michael Donelan, director of trading and head portfolio manager who oversees $3.5 billion of bonds at Ryan Labs Inc., a money management and research firm in New York that sold two-thirds of its position in Goldman Sachs debt on April 30. “Citigroup actually could be further down the line as far as regulatory risk concern.”
Federal Investigation
U.S. prosecutors are investigating Goldman Sachs, where Lloyd Blankfein has served as chief executive officer since 2006. The Securities and Exchange Commission filed a civil lawsuit on April 16 alleging fraud tied to collateralized debt obligations. The firm called the SEC’s claims “unfounded.”
“No one’s attacking Citigroup over anything anymore, and everyone’s attacking Goldman Sachs over everything,” said Richard Bove, a banking analyst at Rochdale Securities in Lutz, Florida. “It logically tells you that Citigroup should have a lower spread to Treasury than Goldman Sachs does.”
Elsewhere in credit markets, fallout from the Greek sovereign debt crisis helped push the extra yield investors demand to hold European company bonds instead of benchmarks up to the same level as U.S. debt, according to Bank of America Merrill Lynch index data. The spread on investment-grade bonds in euros rose 7 basis points to 164, the same yield premium as on U.S. securities.
Globally, the spread on corporate debt versus Treasuries added 5 basis points to 158, Bank of America Merrill Lynch’s Global Broad Market Corporate Index shows. That’s the biggest jump since March 30, 2009, when the gap widened by the same amount to a record 511 basis points. Average yields fell 1.6 basis points to 3.898 percent, the lowest since April 27, the index shows. A basis point is 0.01 percentage point.
ECB Rates
European Central Bank President Jean-Claude Trichet is under pressure to do more to calm markets after a meeting in Lisbon today at which policy makers kept the region’s main refinancing rate at a record-low 1 percent. The pledge of a 110 billion-euro ($142 billion) bailout for Greece failed to assuage investor concern about the ability of the region’s most indebted nations to fund themselves.
Yields over benchmark rates on junk bonds rose 23 basis points, the most since June 2009, to 591, according to Bank of America Merrill Lynch indexes. High-yield, or junk, bonds are rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.
Developing-nation debt fell, with the yield spread over Treasuries widening by 11 basis points to 291, according to JPMorgan Chase & Co.’s EMBI+ Index.
Bank Bond Risk
The cost of protecting European bank bonds from default surged to the highest in 13 months, with credit-default swaps on the Markit iTraxx Financial Index of 25 banks and insurers soaring as much as 19 basis points to 167, according to JPMorgan Chase & Co. That’s the highest level since April 3, 2009. The index was up 11 basis points at 159 as of 1:06 p.m. in London.
Credit-default swaps tied to junk corporate debt rose to the highest level since Nov. 30. The Markit iTraxx Crossover Index of 50 mostly high-yield European companies surged 25.5 basis points to 505.75, Markit Group Ltd. prices show.
Turmoil in Europe’s financial system led banks in the region to borrow 2.63 billion euros from the ECB’s marginal loan facility on May 3, the most since March 10, central bank data show. The amount of overnight deposits held at the Frankfurt- based bank rose to 268.7 billion euros on May 4, the highest since July.
Financial institutions may be growing more reluctant to lend to each other in the interbank market on concern the crisis will hurt the quality of loan collateral.
‘Suspicious’
“There are echoes here of the July to August 2007 period, when people became very suspicious of what everyone else has on their books,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London.
Brazil’s benchmark borrowing costs slid below Russia’s for the first time this year as investors bet the South American country is less at risk of contagion from the Greek debt crisis than Eastern European nations.
Brazilian dollar bonds yielded 218 basis points more than Treasuries yesterday, compared with 219 for Russia, according to the EMBI+ index. Brazilian yields last were below those on Russian debt, which is rated one level higher by S&P and two by Moody’s, on Dec. 21.
California’s treasurer boosted the size of a bond sale for the state’s Department of Water Resources by 46 percent to $2.97 billion, after orders from individual investors exceeded $1.2 billion. The issue, now the largest offering of tax-exempt debt this year, was increased twice in response to investor demand, Treasurer Bill Lockyer said in a statement.
The bonds, being sold to refinance debt from the state’s power crisis of 2001-2002, were offered at preliminary yields of 0.92 percent on two-year notes, to 3.8 percent on bonds maturing in 2022, according to data compiled by Bloomberg.
Goldman, Citigroup
Investor faith in Citigroup had been eroded after the U.S. government agreed to a third bailout of the bank in February 2009, giving taxpayers a 36 percent stake.
Goldman Sachs’s 6.15 percent notes due in April 2018 yield 5.92 percent, compared with 5.71 for Citigroup’s 6.125 percent debt due a month later, according to data from Trace, the bond- price reporting system of the Financial Industry Regulatory Authority. The average bond yield for Goldman Sachs increased to 5.39 percent as of May 4, from 4.63 at the end of last year, Bank of America Merrill Lynch index data show.
Michael DuVally, a Goldman Sachs spokesman, and Danielle Romero-Apsilos of Citigroup, declined to comment.
Goldman Swaps
Credit-default swaps traders are charging 53 basis points more to protect Goldman Sachs bonds for one year than notes from New York-based Citigroup, run by Chief Executive Officer Vikram Pandit, according to CMA DataVision. Before the SEC filed its fraud suit, Goldman Sachs one-year swaps cost 15 basis points less than Citigroup’s.
Credit-swaps 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 contract protecting $10 million of debt.
Goldman Sachs’s “reputation, their loyalty and relationships is what everyone talks about,” said James Barnes, money manager at Wyomissing, Pennsylvania-based National Penn Investors Trust Co., where he helps oversee $1 billion in fixed- income assets. “If that becomes challenging to maintain, that’s where you can see a continuation in spreads widening.”
To contact the reporters on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net; Bryan Keogh in London at bkeogh4@bloomberg.net
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