Goldman Sells $5.5 Billion of Bonds in Post-Earnings Binge

(Bloomberg) — Goldman Sachs Group Inc. and Wells Fargo & Co. joined rival JPMorgan Chase & Co. in the tapping the US investment-grade market after reporting second-quarter earnings.

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Goldman sold $5.5 billion of bonds in two parts, according to a person with knowledge of the matter. The longest portion of the offering, an 11-year security, yields 1.17 percentage point above Treasuries, after initial discussions of around 1.45 percentage point, said the person, who asked not to be identified as the details are private.

Proceeds from offering will be used for general corporate purposes and Goldman is the sole underwriter of the deal, added the person.

Goldman’s trading unit powered a surge in earnings in the second quarter. Both fixed-income and equity traders outpaced analysts’ estimates, while a rebounding capital-markets business helped drive better-than-expected results across much of the company’s Wall Street operations.

Wells Fargo, meanwhile, tapped the US high-grade market with a $2 billion perpetual securities offering a day after it raised €2.75 billion ($3 billion) in the European debt market.

This is the first sale of a preferred stock series by one of the so-called Big Six lenders in the US in almost two months, following a spurt of deals earlier this year when hopes of rate cuts by the Federal Reserve were fading. It’s also Wells Fargo’s first since last summer, when it effectively reopened a market that had remained shut since the regional banking crisis.

The new issue “looks like a net AT1 addition (no refinancing),” CreditSights Inc. analysts Jesse Rosenthal and George Milonopoulos wrote in a Tuesday client note. This refers to the role of preferred shares as a source of Additional Tier 1 capital for US banks, played by contingent convertible bonds in other parts of the world.

Representatives for Goldman didn’t respond to a request for comment. Wells Fargo declined to comment.

JPMorgan kicked off the issuance spree from the big banks on Monday, borrowing $9 billion in a four-part offering that garnered over $28 billion in investor demand. The longest portion of the deal, an 11-year tranche, drew upwards of $12 billion in orders. That allowed the lender to pay just low single-digit concessions to sell the debt, Bloomberg’s Brian Smith wrote in a note.

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More on the Way

The top banks are expected to borrow more than they usually do after they post earnings as they take advantage of falling yields and get ahead of upcoming US elections that could potentially bring market turmoil. The big banks are some of the largest issuers of investment grade corporate debt and their funding decisions help set the tone for the rest of that market.

JPMorgan credit analyst Kabir Caprihan expects $21 billion to $24 billion of issuance from the six biggest domestic banks, more than the 10-year July average of roughly $17 billion. Barclays analysts including Peter Troisi are calling for about $30 billion in the third quarter, with most of that expected this month.

Bank of America Corp. reported trading and investment-banking results that topped analysts’ estimates while Morgan Stanley’s trading business posted the biggest increase among its peers in the second quarter. The two lenders, alongside Citigroup Inc. are also candidates to sell debt this month.

‘Unwarranted’ Angst

Global systemically important banks have borrowed an average of $21 billion in the US high-grade market in the four weeks following earnings every year since 2014, JPMorgan analysts Eric Beinstein and Nathaniel Rosenbaum wrote in a research note on Tuesday.

“Many investors tend to be cautious on bank spreads heading into these heavy supply weeks but the historical data suggests this is unwarranted,” wrote the analysts.

Bank bond spreads — and in some cases bank stocks — have outperformed during the heavy supply weeks, according to the note. The average spread on a financial institution bond is just 4 basis points wider than the broader high-grade index.

“This suggests that it is the strength of bank earnings that have, over the past 10 years, contributed to the outperformance of both bank stocks and bonds,” they wrote.

–With assistance from Brian Smith and Tasos Vossos.

(Updates to show the deals have priced.)

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