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Structured Note Sales Slow in Third Quarter as Volatility Drops

Third-quarter sales of structured notes in the U.S. fell to the lowest this year as a new round of quantitative easing and the lead-up to the November presidential election damped market volatility.

Investors bought $9.37 billion of the securities, down 4.3 percent from the previous quarter, according to data compiled by Bloomberg. It was the second-lowest three-month period for issuance since at least the beginning of 2010, exceeding only the $8.6 billion sold in the fourth quarter of last year.

The Federal Reserve’s announcement of an open-ended bond buying program and investors adopting a wait-and-see attitude before the presidential election contributed to lower volatility, said Scott Miller Jr., a managing partner at Blue Bell Private Wealth Management LLC. When assets are less volatile, the options embedded in certain types of structured notes are cheaper, hurting the ability of issuers to offer enticing features.

The value of the securities is “not as attractive as it was and that’s a little bit of a hard pill to swallow,” Miller said. Current terms, such as the level of protection against losses, aren’t as good as they have been in the past two or three years, he said.

The Chicago Board Options Exchange Volatility Index, known as the VIX (VIX), fell to 13.45 on Aug. 17, the lowest since June of 2007. During the quarter, the benchmark didn’t close above 20.47, which is close to its average historical value of about 20.35 since March 30, 1990.

Global sales excluding the U.S. were $19.4 billion last quarter, a 6.5 percent gain from the previous three months, Bloomberg data show. Issuers sold 889 notes, 15 percent fewer than in the second quarter.

Low Rates

In the U.S., sales were also hurt by interest rates close to historical lows and lower bank funding levels, said John Tessar, senior vice president at JVB Financial Group LLC in Boca Raton, Florida.

“You can’t really attract investors with better-than- before yield,” he said in a telephone interview.

The yield on benchmark Treasury notes averaged 1.62 percent for the quarter and touched a record low of 1.3875 percent on July 24. The average of five-year credit-default swaps on six of the largest U.S. banks, including Bank of America Corp., the biggest structured note issuer, declined 29 percent during the period. That meant they had to pay investors less to borrow funds.

Euro Stoxx Notes

Deutsche Bank AG sold the largest U.S. note of the quarter, $429.6 million of 18-month securities tied to the Euro Stoxx 50 Index on Sept. 14, Bloomberg data show. They yield a minimum of 7.6 percent unless the benchmark falls more than 20 percent from its initial value, according to a prospectus filed with the U.S. Securities and Exchange Commission. The notes sold a week after European Central Bank President Mario Draghi said policy makers had agreed on a bond-buying plan to support the euro.

Investors bought $336.9 million of securities linked to the price of gold last quarter, more than four times the amount of the previous period, the data show. Barclays Plc sold $143.2 million of one-year notes tied to the metal on Sept. 28, the biggest such deal in 2012, that pay as much as 17.5 percent and protect against losses as long as gold doesn’t decline by more than 15 percent, according to a prospectus filed with the SEC.

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.

Bloomberg began collecting comprehensive data on U.S. SEC- registered securities in January 2010.

To contact the reporter on this story: Kevin Dugan in New York at

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

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