Pablo Salame, co-head of Goldman Sachs Group Inc’s trading division, said the surprise of last year was that the US Federal Reserve’s tapering of bond purchases did not cause the collapse of any market participants. Some may not be so lucky when the central bank raises short-term rates, he said.
The Fed’s decision to taper was not dysfunctional to markets, Salame said in a video posted yesterday on New York-based Goldman Sachs’ Web site. Signs the Fed could curtail its US$85 billion of monthly purchases helped push the yield on 10-year Treasuries from 1.63 percent in May last year to about 3 percent in September.
“Some of us would have guessed that such a large move would have exposed certain players in the market’s excess leverage to those transactions that would have led to maybe some liquidations or some bankruptcies,” Salame said. “The great success of 2013 can mostly be measured in the fact that there were really no such newsworthy events in the year.”
An increase in the steepness of the yield curve, or the difference between short-term and long-term rates, may make markets more turbulent when the Fed begins raising rates, he said.
Carry trades, in which investors buy long-dated bonds and finance those purchases with short-term borrowing, are probably increasing with a steeper yield curve, he said.
“Once the Fed starts hiking, the market reaction will be less stable,” Salame said. “I would assume there are a lot more positions today in the market and the amount of leverage that you have in this part of the curve is higher.”
Salame joined Goldman Sachs in 1996 and became co-head of the securities unit in 2008. He started his career at Goldman Sachs in emerging markets currency trading and later helped lead the global emerging debt markets group.
The rotation from bonds into stocks is likely to continue this year, Salame said. Active hedge-fund and mutual-fund managers will probably receive inflows to take advantage of opportunities created by the growing portion of assets invested in passive strategies, he said.
“The opportunities around relative value for active management are continuing to increase” as investors put more money into passive management, he said. “Going forward, we think there’s ample opportunity in the equities side that comes from that.”
Goldman Sachs’ clients are bullish on Japanese assets after the Nikkei 225 Index jumped 57 percent last year, Salame said.
Clients are cautious on emerging markets and are more invested in Europe now that concerns the EU might break up have subsided, he said.