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‘Dual Directional’ Structured Notes Rise to Three-Year High

Banks are raising the most in at least three years in issuance of U.S. structured notes that pay the same returns whether the linked asset rises or falls.

Since November, banks have sold $350 million of so-called “dual directional” securities, which yield the absolute value of any return within a certain range, according to data compiled by Bloomberg. Before then, the most recent month with more than two offerings was March 2009, with nine deals for $58.1 million, according to Securities and Exchange Commission records.

Demand for the notes has increased amid investor concern that the Standard & Poor’s 500 Index may decline after the best first quarter since 1998 as Europe’s sovereign debt crisis threatens to flare up again, said Alexandre Ecot, a director at Societe Generale SA’s cross-asset group, which sells derivatives and structured notes.

“Investors have mixed feelings about the direction of the market,” Ecot said in a telephone interview yesterday. “Investors don’t know if there is still some upside, and they’re afraid of the potential downside.”

Most of the dual-directional sales, or $246.6 million, have been since the beginning of March. The S&P 500 dropped the most this year on April 10 as a surge in Spanish and Italian bond yields fueled concern that Europe’s debt crisis is worsening.

JPMorgan Chase & Co. has issued $153.2 million of the securities in the last six months, the most of any bank, with the S&P 500 (SPX) as the most common underlying benchmark, Bloomberg data show. After gaining 12 percent for the first three months this year, the index is down 1.3 percent in April.

Citigroup Offering

The largest offering over that period was tied to the S&P 500. Citigroup Inc. sold $43.1 million of two-year notes that yield a positive return if the gauge doesn’t decline by more than 20 percent and 1.5 times any gains, with a 12.3 percent cap, according to a prospectus filed with the SEC. Investors risk losing their principal below that threshold. The New York- based bank distributed the notes for a 2.25 percent commission.

Low market volatility makes it harder to create attractive coupons on the notes, because the derivatives embedded in the products have a lower value, Ecot said. The VIX, as the Chicago Board Options Exchange Volatility Index (VIX) is known, fell to an almost five-year low on March 26.

Structured notes are securities created by banks, which package debt with derivatives to offer customized bets to investors while earning fees and raising money. Derivatives are contracts whose value is derived from stocks, bonds, currencies and commodities.

To contact the reporter on this story: Matt Robinson in New York at

To contact the editor responsible for this story: Alan Goldstein at

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