Goldman sells $5.5 billion in bonds after earnings report

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

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Goldman Sachs sold $5.5 billion of bonds in two parts, according to a person familiar with the matter. The longer part of the offering, an 11-year note, yields 1.17 percentage points more than Treasuries, after initial discussions around 1.45 percentage points, said the person, who spoke on condition of anonymity because the details are confidential.

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

Goldman’s trading division delivered a sharp rise in second-quarter profits. Fixed-income and equity traders both beat analysts’ expectations, while a rebound in capital markets activity helped drive better-than-expected results at most of the firm’s Wall Street businesses.

Wells Fargo, meanwhile, tapped the U.S. investment grade bond market with a $2 billion perpetual securities offering, a day after raising €2.75 billion ($3 billion) in the European debt market.

It’s the first preferred stock sale by one of the Big Six banks in nearly two months, following a series of deals earlier this year as hopes of a rate cut by the Federal Reserve faded. It’s also Wells Fargo’s first sale since last summer, when it effectively reopened a market that had been closed since the regional banking crisis.

The new issuance “looks like a net AT1 addition (without refinancing),” CreditSights Inc. analysts Jesse Rosenthal and George Milonopoulos wrote in a client note Tuesday. That’s a reference to the role of preferred stock as a source of additional Tier 1 capital for U.S. banks, played by contingent convertible bonds in other parts of the world.

Goldman representatives did not respond to a request for comment. Wells Fargo declined to comment.

JPMorgan kicked off a wave of debt offerings from big banks on Monday, borrowing $9 billion in a four-part offering that attracted more than $28 billion in investor demand. The longest part of the deal, an 11-year tranche, attracted more than $12 billion in demand. That allowed the lender to pay only single-digit concessions to sell the debt, Bloomberg’s Brian Smith wrote in a note.

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Others are in preparation

Big banks are expected to borrow more than they usually do after reporting earnings as they take advantage of falling yields and anticipate the upcoming U.S. election that could potentially cause market turmoil. Big banks are among the largest issuers of investment-grade corporate debt, and their financing decisions help set the tone for the rest of that market.

JPMorgan credit analyst Kabir Caprihan expects $21 billion to $24 billion in issuance from the six largest domestic banks, more than the 10-year average in July of about $17 billion. Barclays analysts, including Peter Troisi, expect 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 beat analysts’ expectations, while Morgan Stanley’s trading business posted the biggest gain among its peers in the second quarter. Both banks, along with Citigroup Inc., are also candidates for debt sales this month.

“Unjustified” anxiety

Global systemically important banks have borrowed an average of $21 billion in the U.S. investment-grade bond market in the four weeks following their earnings releases each year since 2014, JPMorgan analysts Eric Beinstein and Nathaniel Rosenbaum wrote in a research note Tuesday.

“Many investors tend to be cautious on bank spreads heading into these weeks of heavy supply, but historical data suggests this is not warranted,” the analysts wrote.

Spreads on bank bonds – and in some cases bank stocks – have outperformed during the weeks of abundant supply, the note said. The average spread on a financial institution bond is just 4 basis points wider than that of the broad investment-grade bond index.

“This suggests that it is the strength of bank earnings that has contributed to the outperformance of bank stocks and bonds over the past decade,” they write.

–With assistance from Brian Smith and Tasos Vossos.

(Updates to show that offers have a price.)

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