Fixed Income Recap

Treasuries
The two-year finished the day up 3/64, and the ten-year was higher by 41/64. The benchmark curve was 3.5 basis points flatter on the day, and currently sits at +193.5 basis points. A basis point represents .01%.

Today the New York Fed purchased $7.3 billion in Treasury notes ranging in maturities from 9/30/13 to 2/15/16. $5.6 billion of the purchases were in issues maturing in February 2014 and earlier. Despite the shorter buying, the longer end outperformed immediately following the announcement, and the outperformance gained steam as the day wore on, as evidenced by the flattening curve.

Goldman Sachs Equity Offering
Goldman Sachs raised $5 billion by selling common stock today at $123 per share. Shares were trading below 117 by early afternoon on concerns about dilution of common shareholders and a report from S&P confirming their negative outlook on Goldman’s “A” credit rating.

On October 28th of last year Goldman Sachs received $10 billion in capital through the Treasury’s Troubled Asset Relief Program in the form of preferred stock paying a 5% dividend. At first glance this may have looked like a good deal for Goldman. A month before the TARP deal Goldman issued $5 billion of 10% preferred stock to Warren Buffet, so 5% may looked pretty cheap.

However, Goldman, along with other companies receiving TARP funds, soon felt the brunt of the government’s influence as an equity investor. The uproar in the news about compensation for employees at companies receiving government assistance has had its effect at Goldman, who has long had the highest paid employees on Wall Street. Executives have forgone bonuses and with Geithner’s recent threats to mandate the pay across any company receiving TARP, Goldman, along with others, are concerned with their ability to retain and attract talent in the future. Needless to say, the dividend payment was not the extent of the costs associated with accepting aid from the US Government.

With today’s $5 billion equity sale, Goldman claims it now only needs approval from the Treasury to pay back the $10 billion in TARP funds it received and escape the influence of politicians. There’s only one catch. Along with the preferred stock, the government received warrants to buy 12.2 million shares of Goldman Sachs common stock at $122.90 a share at any time before October 28th 2018. If these were exercised today it would amount to a 2.5% stake in the company. These are not surrendered if Goldman gets the ok to redeem the government’s investment, so this would do little if anything to escape government influence.

Goldman may be paving the way for the unwinding of TARP, but a greater question remains to be answered before too much hope persists. What does the government really plan on doing with those warrants?

Have a great evening.

Cliff J. Reynolds Jr., Junior Analyst