Structured Note Sales for International Stock Basket Rise 65%

U.S. investors are buying 65 percent more notes linked to a basket of U.K., European and Japanese stock indexes this year, spurred by a 12 percent average gain in the benchmarks since May.

Banks have sold $908 million of U.S. notes tied to the Euro Stoxx 50 Index (SX5E) of the 50 largest euro-area companies, the U.K.’s FTSE 100 Index, and Japan’s Tokyo Stock Price Index (TPX), known as the Topix Index, making the basket the most popular this year, according to data compiled by Bloomberg. They issued $549 million of the securities during the same period last year.

Investors are increasingly looking overseas now that concerns have eased that Europe’s sovereign debt crisis will worsen, said Michael Gayed, chief investment strategist at Pension Partners LLC and a portfolio manager of the ATAC Inflation Rotation Fund in New York.

“You had this tremendous negative narrative over the end of Europe and it caused prices to fall so much that you had almost fire sale levels,” Gayed said.

The Euro Stoxx 50 has climbed 20 percent since the end of May, after dropping 8.5 percent during the first five months of 2012.

Investing in notes linked to international stock indexes could “potentially be a significant shift” away from domestic stock benchmarks such as the Standard & Poor’s 500 Index, said Eric Greschner, co-founder and portfolio manager at Regatta Research & Money Management LLC.

Surging Sales

Sales of securities linked to the basket containing the Euro Stoxx 50, FTSE 100 and Topix have surged 76 percent this month from October. Issuance of notes tied to both the S&P 500 and Russell 2000 Index fell 51 percent during the same period.

The S&P 500 and Russell 2000 basket is the second-most popular this year, accounting for $492.2 million in U.S. sales.

Euro Stoxx 50 returns have a 55 percent weighting in the five top-selling notes tied to the international equity basket this year, according to prospectuses filed with the U.S. Securities and Exchange Commission.

The Topix, which comprises 1,675 companies listed on the first section of the Tokyo Stock Exchange, accounts for 23 percent. The FTSE 100 Index, the stock benchmark of the 100 largest companies traded on the London Stock Exchange, makes up 22 percent.

Lower Correlation

Baskets that contain components that are less correlated to each other are less volatile, making certain options embedded in the structured notes cheaper to buy. Issuers can then offer better terms on the securities.

Daily price moves in the Euro Stoxx 50 were .85 correlated with the FTSE 100 Index (UKX) and .28 with the Topix this year, Bloomberg data show. That compares with .92 for the S&P 500 and Russell 2000.

Credit Suisse Group AG (CS) issued $51.4 million of one-year notes on Aug. 10 tied to the group of international stock indexes, the largest such sale this year. The notes yield twice the gains of the basket to a limit of 19.2 percent, with protection from the first 10 percent of losses, 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.

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

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