Commodity-Tied Note Sales Fall 41%, Led by Drop in Copper

U.S. sales of structured notes linked to commodities have plunged 41 percent this year, led by a drop- off in securities tied to copper, an industrial metal viewed as an economic barometer.

Issuance of commodity-linked notes fell to $2.04 billion during the first nine months, down 97 percent from $3.44 billion during the year-earlier period, according to data compiled by Bloomberg. $7.9 million of the securities were linked to copper this year, down from $261.6 million of volume tied to the metal in the first three quarters of 2011.

Investors were concerned that the price of copper would slump with lowered growth forecasts for China, the world’s second-largest economy and source of about 40 percent of demand for the metal, said Michael Gayed, chief investment strategist at Pension Partners LLC in New York. Copper inventories at bonded warehouses in Shanghai probably climbed to a record 650,000 metric tons last month, according to estimates compiled by Bloomberg.

“China has lagged in terms of stimulus,” Gayed said in a telephone interview, referring to efforts to boost growth amid a drop in manufacturing and fewer exports to Europe. The Asian Development Bank cut its forecast for Chinese economic growth to 7.7 percent this year from a previous estimate of 8.2 percent.

Total U.S. issuance of notes tied to metals excluding gold fell to $87.5 million in 2012 from $640.7 million a year earlier.

Sales of gold-linked securities surged to $723.4 million from $316.8 million, Bloomberg data show. The spot price of gold has risen about 3 percent to $1,787 an ounce since the Federal Reserve said on Sept. 13 that it would begin a third round of so-called quantitative easing.

Biggest Sales Decline

JPMorgan Chase & Co. (JPM) had the largest decline in issuance of commodity-tied notes in the U.S. this year, selling $19.1 million of the securities, or 95 percent less. UBS AG had the biggest gain, issuing $149.5 million of notes in 30 offerings, more than 17 times its year-earlier total.

Barclays Plc sold the largest note in 2012 on Sept. 28, $143.2 million of one-year securities tied to the price of gold. Svensk Exportkredit AB issued last year’s biggest note on Jan. 19, $94.9 million of 14-month securities tied to the price of copper.

Bank of America Corp. (BAC) sold $7.9 million of the only note this year linked to copper on Jan. 4. The note pays twice the gains of the spot price of the commodity to 28.45 percent with 90 percent of capital at risk, according to a prospectus filed with the U.S. Securities and Exchange Commission. The bank distributed the note for a 2 percent fee.

Banks create structured notes by packaging debt with derivatives to offer customized bets to retail investors while earning fees and raising money. Derivatives are contracts whose value is derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

To contact the reporter on this story: Kevin Dugan in New York at kdugan4@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.