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Bloomberg
Goldman Sachs Group Inc. handed a surprise gift to bondholders in Canada this week by redeeming debt sooner than investors had expected, and some money managers are betting that other banks will follow its lead.
The New York-based bank said that it was redeeming all of its $380 million in subordinated notes maturing in April 2022 for a price equal to principal plus accrued interest. The bonds jumped by about 1.76 cents to 100.376 cents on the news. The move was unexpected after JPMorgan Chase & Co. opted not to call similar bonds last year, said Mark Carpani, a portfolio manager at Ridgewood
Capital Asset Management.
The bonds investors are looking at are known as fixed to floating-rate notes, which start off paying a fixed rate, and after some time switch to floating-rate securities. That change can be painful for investors: the notes that JPMorgan opted not to redeem last year paid a fixed coupon of 5.058 percent until February, when they switched to a floating coupon, which now stands at 1.953 percent.
Prices on Canadian-dollar bonds callable this year from Bank of America Corp. and Citigroup Inc. rose on Tuesday after the Goldman announcement. It’s “highly likely†that investors are bidding up those bonds in anticipation that they could also be called now, Carpani said.
Vik Bamboukian, a vice president in trading at Desjardins Securities Inc., said he would be keeping a close eye on bonds like Citigroup’s and Bank of America’s fixed-to-floating notes.
Goldman Sachs may end up issuing fixed-rate notes in Canada this year, said Bamboukian. In switching out of floating-rate debt, the bank could be responding to forecasts for rates to rise in the U.S. Carpani said. Canada’s rates often track those of the U.S., he said.
The market is forecasting about a 25 percent chance of rates rising in Canada by the end of the year, according to data compiled by Bloomberg.
“They can reissue fixed rate bonds at a fairly attractive rates to them,†Carpani said.