Goldman’s Salame Sees Fed Rates Inflicting More Pain Than Taper

Pablo Salame, co-head of Goldman Sachs Group Inc.’s trading division, said the surprise of 2013 was that Federal Reserve tapering of bond purchases didn’t 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 wasn’t dysfunctional to markets, Salame said in a video posted yesterday on New York-based Goldman Sachs’s website. Signs the Fed could curtail its $85 billion of monthly purchases helped push the yield on 10-year Treasuries (USGG10YR) from 1.63 percent in May 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,” said Salame, 48. “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.

Photographer: Andrew Harrer/Bloomberg

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The Marriner S. Eccles Federal Reserve building stands in Washington, D.C.

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Photographer: Andrew Harrer/Bloomberg

The Marriner S. Eccles Federal Reserve building stands in Washington, D.C.

“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.”

Equities ‘Opportunities’

Salame, who’s from Ecuador, joined Goldman Sachs in 1996 and became co-head of the securities unit in 2008. A partner since 2000, 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 in 2014, 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 such as exchange-traded funds, 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’s clients are bullish on Japanese assets after the Nikkei 225 Index (NKY) jumped 57 percent in 2013, Salame said. Clients are cautious on emerging markets including China, and are more invested in Europe now that concerns the European Union might break up have subsided, he said.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net

To contact the editor responsible for this story: Peter Eichenbaum at peichenbaum@bloomberg.net

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