As is common practice with other large multinational financial institutions, Goldman Sachs (GS) has issued debt (bonds) denominated in local currency of some of the countries where they conduct business. This week, we look at a short five-year Goldman Sachs bond denominated in the Australian Dollar yielding nearly twice that of its similar US dollar counterpart. Although investment grade corporate bonds in Australia don’t tend to have the higher double digit yields that can occasionally be obtained in such emerging market economies as Brazil (10.5% BAC bond review) or Russia (11% JPM bond review), the more established and proven economy of Australia also carries with it less risk.
The high 7.75% yield and relatively short five-year maturity of this Aussie bond, along with its solid A+ investment grade rating, compares extremely favorably in relationship to other high yield instruments in our Foreign and World Fixed Income holdings, and we consider the recent sharp drop in the strength of the Aussie dollar a great opportunity for increasing an exposure to the Australian currency within a basket of foreign fixed income holdings. We believe that the US dollar’s recent strengthening against many world currencies is predominately related to uncertainties concerning the euro, and that the longer-term trend of devaluation and a loss of the US dollar’s buying power remain a major concern for investors. By moving a portion of their total assets away from the US dollar to obtain the significantly higher yields of sound issuers in many the world’s strongest economies, it may be possible for some clients to mitigate or substantially reduce the risk of a persistent wealth destruction resulting from further US dollar devaluation.
Wealth Preservation Concerns
With equity and commodity markets thrashing about with no consistent or clear direction, wealth preservation remains a top priority for many people. Declining equity and property prices, ultra-low interest rates, minimal pay raises, elevated inflation, ineffective politicians, potentially increased taxes, the Fed’s constant printing of more money, and now, with the Europeans circling the wagons to defend the euro and restrictions on their citizens purchasing metals starting to emerge within their ranks, it appears that the effect of eroding wealth will continue until the aforementioned conditions begin to change. Slowly, the traditional safe havens for wealth are all being attacked, and are diminished. The mere change of the Chicago Mercantile Exchange’s margin requirements for gold appears to have sent it hundreds of dollars lower in a matter of a few days. Silver? Crushed as if it were nothing more than any other industrial use metal is in a slowing economy.
More than one pundit has been heard advocating “sovereign debt” to be the only really “safe” place to put one’s wealth plus gain income. However, undertaking the effort to protect one’s assets against the persistent destruction associated with an ever increasing supply of federal dollars appears to perhaps be an even more prudent move, and it is the reason we have chosen this high 7.75% yielding Goldman Sachs five year Aussie bond as This Week’s Best Bond.
Australia's abundant and diverse natural resources include extensive reserves of coal, iron ore, copper, gold, natural gas, uranium, and renewable energy sources. It also has a large services sector and is a significant exporter of natural resources, energy, and food. Key tenets of Australia's trade policy include support for open trade and the successful culmination of the Doha Round of multilateral trade negotiations, particularly for agriculture and services.
The Australian economy grew for 17 consecutive years prior to the global financial crisis. Subsequently, the Rudd government introduced a fiscal stimulus package worth over US$50 billion to offset the effect of the slowing world economy, while the Reserve Bank of Australia cut interest rates to historic lows. These policies - and continued demand for commodities, especially from China - helped the Australian economy rebound after just one quarter of negative growth. The economy grew by 1.2% during 2009 - the best performance in the OECD - and by 3.3% in 2010. Unemployment peaked at 5.7% in late 2009 and fell to 5.1% in 2010. As a result of an improved economy, the budget deficit is expected to peak below 4.2% of GDP and the government could return to budget surpluses as early as 2015.
Although Australia has experienced persistent deficits since World War II, the estimated 2010 deficit of $30.4 billion, a mere 2.46% of GDP, bringing the total outstanding public debt to 22.4 % of GDP (2010 est.) The 2010 inflation rate stood at 2.9%, with current unemployment rates about 5.1%. Exports exceeded imports to the tune of 10.3 billion, with partners China, Japan, South Korea, and India all listed ahead of the US. The longer-term outlook remains good as Australia's terms of trade appear to have reached record peaks with prices for key export commodities staying high thanks to voracious demand from China and the rest of Asia.
Public debt to GDP
Australia in A$
A$ 20.3 billion
United States in USD
|100.0 %||US$ 1.294 Trillion||1.28 Trillion||1.94 Trillion|
Stanford University has rated the Australian economy number #1 on its global Sovereign Fiscal Responsibility Index. This recognition helped highlight how much stronger Australia’s financial condition is compared to #28 ranked (out of 34) United States, which came in only four points above a defaulted Iceland.
Australian dollars (AUD) per US dollar -
About Goldman Sachs
The Goldman Sachs Group, Inc. is a global leader in investment banking and securities that engages in investment banking, buying and selling securities, asset management and many other financial services focusing on institutional clientele and high net worth individuals. Goldman Sachs' headquarters is located at 200 West Street, New York, and was founded in 1869. Former employees include Robert Rubin and Henry Paulson, who both served as the United States Secretary of the Treasury after resigning from Goldman Sachs, thus the nickname "Government Sachs."
Liquidity is of critical importance to companies in the financial services sector, and most failures of financial institutions have occurred in large part due to insufficient liquidity. Accordingly, Goldman Sachs has in place a comprehensive set of liquidity and funding policies that are intended to maintain significant flexibility to address both Goldman Sachs-specific and broader industry or market liquidity events. Management's stated principal objective is to be able to fund Goldman Sachs and to enable their core businesses to continue to generate revenues, even under adverse circumstances.
To finance the firm’s business, Goldman Sachs issues various types of short- and long-term securities, including promissory notes, commercial paper, medium-term notes and global bonds. It currently has about $ 815Bn in cash, $ 485Bn in debt, and its International bonds are solid Investment grade quality, being A+ rated by S&P.
|Goldman Sacks domiciled bond||Yield||Maturity||Rated|
|US Dollar||4.25 %||09/15/2016||A+|
|Australia Dollar||7.25 %||11/01/2016||A+|
The default risk is Goldman Sachs' ability to perform. Given its strong cash position, financial strength and evidently close political connections, it is our opinion that the default risk for this short to medium term bond is minimal relative to the currency risk of the Aussie dollar.
The currency risk of the Aussie dollar could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to the Australian economy.
Accessibility and Liquidity
Goldman Sachs currently maintains over $485 billion of outstanding debt, mainly denominated in U.S. dollars. Aside from owning various emerging market funds and ETFs that blend together various winners and losers into a mixed yield cocktail, the question arises as to how a retail investor might own or acquire individual, maturity definite Goldman Sachs Australian dollar denominated bonds. Many times broker/dealers require an institutional sized single bond purchase. However, with a broker and advisor's assistance, it is possible for a number of retail clients to be combined together in order to make a larger institutional sized purchase. Previously, we have been able to facilitate purchases as low as $ 10,000 U.S. dollars.
We continue to search for individual corporate instruments denominated in the currencies of growing economies that yield higher than average returns to help protect our clients against the erosion of wealth that results from a constant decline in the US dollar relative other foreign currencies. We acknowledge that a stronger US dollar would directly reduce the total returns of this Aussie bond. Conversely, if the US dollar continues on the longer term path of devaluation that it has been on, this alone would add significantly to the already highly positive accruing returns of this bond.
Considering Australia’s long-term position as a stable economy and political system with shrew fiscal management will likely correlate with a stable and possible strengthening of the commodity based Australian dollar relative to the US dollar, we view the gaining of almost twice the yield from such a reputable issuer as Goldman Sachs as an incredibly compelling reason for choosing the Aussie dollar bond over the similar Yankee (US dollar) bond. The combination of offering a remarkably high yield, some protection against a further loss of wealth with any long-term continuation of the US dollar’s weakness against the Aussie dollar, and a diversification away from heavily overweight US dollar based assets into one of the world’s top tier fiscally conservative countries is why we are adding it at this time to our Foreign and World Fixed Income holdings.