Goldman Sachs Group, Inc. (NYSE:GS) recently decreased, quite substantially, the amount of money it can lose if interest rates increase, resulting in the fall of bond prices. The Bank further hiked its borrowing in order to gain low interest rates. This move comes in the wake of growing concerns of the bank over the bond market.
Recently two top officials gave their cautious statement about the bond market. Last week COO Gary Cohn, at the World Economic forum in Davos, said many investors and banks may not be ready for the potential "significant repricing" in the bond market. According to Cohn, "At some point, interest rates will go higher again, and all of the money that has piled into fixed income over the past three years, some of it will come out."
In another statement, the CEO of Goldman Sachs Group, Inc. (NYSE:GS), Lloyd Blankfein, said the risk of the bond market's downfall is increasing, and investors are not prepared to face this. He said this in a conference sponsored by New York Times. Blankfein advised investors to increase their level of borrowing in order to benefit from the low interest rates.
It seems Goldman is following its own advice, as the Bank borrowed $8 billion from the bond market, along with a three-part $6 billion debt offering, the largest ever by the Bank. The borrowing of the bank shot from $5.2 billion in January in the last year. Goldman exchanged some of its 3 year bonds for debt, which it is not required to pay back until 2023.
Goldman, while reporting its earning in the fourth Quarter, stated that the amount, which it can potentially loose if the interest rate rise, popularly known as Value at risk in Wall street, has come down to $67 million from $123 million in the fourth quarter of last year. Thus, Goldman Sachs Group, Inc. (NYSE:GS) has already moved forward in the direction of protecting itself like it did during 2006 and 2007 in the run-up to the housing bust.
However, the way, which Goldman adopted to protect itself from the bond market crash, is not clear as to how it is similar to that taken in 2006 and 2007. According to the sources, the bank has established a secretive division that has placed $1 billion of the firm's money as bets on stock and bond, ignoring the proposed ban on such activities. According to Goldman spokesperson, the firm no longer does proprietary trading
According to Brad Hintz, an analyst at Alliance Bernstein, banks are finding it harder to hold on to riskier bonds due to the new and stricter rules. This incapability of banks could lead the prices of bonds to decline more than normal and investors will no longer be interested in holding onto debts.
"When interest rates do rise, what you are going to see is a lot of fat people trying to squeeze through a really small door."
Earlier, Fitch ratings also warned investors of a possible “bond bubble”, which threatens heavy losses for investors once interest rates spike up again.
“If interest rates were to revert rapidly to early-2011 levels, a typical BBB-rated US corporate bond could lose 15pc of its market value, with longer duration bonds [30 years] suffering a 26pc loss,” it said.