Sales of Notes Tied to Proprietary Indexes Drop to 7-Month Low

Sales of U.S. structured notes tied to proprietary indexes fell last month to the lowest since September amid a slump in commodity prices that has hurt the value of some of the securities.

Banks issued $28.5 million of the notes last month, a decline of 65 percent from the $82.4 million sold in January, while total sales dropped 24 percent during the same period, according to data compiled by Bloomberg. Securities tied to tailored indexes that track commodity prices plunged 90 percent to $5 million.

Commodities from copper to silver have lost as much as 21 percent of their value this year. A weaker economy in China, the world’s biggest consumer of metals and energy, has weighed on copper while U.S. fiscal austerity measures may have affected precious metals such as gold.

That makes investors’ diminished appetite for proprietary-index notes linked to commodities unsurprising, said Jim Kaiser, president of FMG Distributors Inc., a securities brokerage in Norwalk, Connecticut. “Once their finger gets burned on the stove, I think they pull back,” he said.

The Standard & Poor’s GSCI gauge of 24 commodities fell 2.1 percent this year as of the close of trading yesterday.

“Similar to last year, the market expected big things from Chinese growth this year,” said Nic Brown, head of commodities research at Natixis in London, in a telephone interview. “And the early signs were not good.”

Sequester Effect

The price of gold, which often rises in times of economic uncertainty, has declined as the U.S. starts to implement fiscal austerity resulting from the so-called sequester, he said. Investor concerns that some central banks may sell their gold reserves have also depressed the metal’s value, according to Brown.

More than half of this year’s $96.4 million of notes tied to tailored indexes of commodities were issued in January by Bank of America Corp. and Deutsche Bank AG, Bloomberg data show.

Bank of America had the biggest such sale, $24.1 million of 14-month notes tied to the Merrill Lynch Commodity index eXtra Precious Metals Plus - Excess Return. The securities, issued Jan. 30, yield three times the gains of the index up to 13.05 percent, according to a prospectus filed with the U.S. Securities and Exchange Commission.

The index, made up of futures contracts on gold, platinum, palladium and silver, has dropped 13 percent since the notes were sold as of yesterday. They last traded at 81.5 cents on the dollar on April 24, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Most Popular

The most popular proprietary index this year is the JPMorgan ETF Efficiente 5 Index (EEJPUS5E), which accounts for $56.2 million of sales, Bloomberg data show. The New York-based bank sold $13.5 million of the notes in April, 40 percent less than in January.

The gauge, which rebalances monthly, is made up of 12 exchange-traded funds and a cash index, according to the prospectus. Investors have bought $1.26 billion of certificates of deposit linked to the benchmark since December 2010, said Elizabeth Seymour, a spokeswoman for the bank.

Matt Card, a spokesman for Bank of America, and Amanda Williams, a spokeswoman for Deutsche Bank, declined to comment or to provide sales data of CDs tied to the lenders’ notes.

Investors bought $2.8 billion of U.S. structured notes in April, compared with $3.33 billion the month before and $3.71 billion in January.

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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