Goldman Whiffs QE2 Call
NEW YORK (
) --
Goldman Sachs
(GS) - Get Report
's economists would appear to have a bit of egg on their faces after picking the wrong end of the yield curve on the
Federal Reserve
's U.S. Treasury Bond purchase plan.
On Wednesday afternoon the Fed's Open Markets Committee (FOMC) announced that it was planning on $600 billion in Treasury bond purchases, better known as QE2.
Following the announcement, prices on long-dated Treasuries, which had been rising ahead of the meeting, took a sudden plunge. The reason for the plunge in price on the longest-dated maturities was that the market had expected the Fed to devote a greater portion of its firepower to those bonds than proved to be the case, says Ian Lyngen, senior government bond strategist at CRT Capital.
"The unwinding of that idea definitely weighed heavily on the bond," he says.
Among the more prominent proponents of that idea was Goldman Sachs. In a research note sent to clients Monday, Goldman economist Ed McKelvey outlined "key expectations for Wednesday's FOMC statement," writing that "most prominent" would be "an announcement of about $500bn in purchases of longer-term Treasury securities," adding "the purchases are apt to tilt toward somewhat longer durations than have been done so far."
"The Goldman Sachs call did get a fair amount of attention, though customers had already been talking and thinking about the idea," says CRT's Lyngen.
It proved wrong, however. As the FOMC made its announcement the New York Fed posted details on its website noting that two and a half- to ten-year Treasuries will account for 86% of the Fed's purchases. Those details were what caused prices on 20-year-plus bonds to fall, Lyngen says.
A Goldman Sachs spokesman declined to comment.
Goldman Sachs has had some unique recent history in regards to the U.S. Treasury market. A former economist at the bank, John Youngdahl, was found guilty of insider trading in 2003 for tipping off Goldman's trading desk that the Treasury planned to stop issuing 30-year bonds. Youngdahl, who was sentenced to 33 months in prison in 2004,
It is tempting to draw the conclusion that the company known as "
Government Sachs
" has been shut out of the information loop. However, Goldman's research team certainly did not publish anything for public consumption about the end of the 30-year bond. In other words, whether or not the Goldman trading desk is benefitting from closer ties to government than that of, say,
Citigroup
(C) - Get Report
,
Morgan Stanley
(MS) - Get Report
or
Bank of America
(BAC) - Get Report
, it would not necessarily show up in the quality of the research product.
Similarly, one should not assume the trading desk got caught flat-footed simply because its research team did.
"Trading, investment banking and research, are completely different departments," says Jeff Harte, an analyst who covers Goldman for Sandler O'Neill.
Harte believes that's a good thing for Goldman, as it may help quiet some of the firm's critics.
"If you look back to the
credit bubble bursting, one of the criticisms of research then was it was just there to support the firm's
trading position," Harte says, adding, "when the company's formal actions don't match the recommendations of its research department I think that's kind of evidence that the research department really is independent."
When it comes to interest rates, however, Harte doesn't believe the trading desk of Goldman, or other big investment banks, takes much of a view on which way the market is headed.
"I don't know that any of the investment banks do a lot of interest rate positioning. I think--especially if there's a government offering, they tend to take the block and pre-hedge it and kind of live and die more by the volume and volatility than so much the price trend," Harte says.
Nor does Harte believe the reputation of Goldman's research team will suffer from the bad call.
"It comes back to the baseball analogy: even the greatest hitters in history didn't even get hits half the time they were up there," he says. "Nobody expects a research analyst, let alone a whole department, to get everything right"
--
Written by Dan Freed in New York
.
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.
