Investors seeking higher yields are buying structured notes tied for the first time to the debt of emerging-market nations from the Bahamas to Lithuania and Honduras.
JPMorgan Chase & Co. (JPM) sold $6 million of credit-linked notes on the Bahamas this week, the first securities to reference the Caribbean islands, according to data compiled by Bloomberg. Natixis (KN) issued debut notes linked to Lithuanian bonds on May 14, while a Jersey-based special purpose vehicle offered the first securities referencing Honduras last month.
Dollar-denominated government bonds from emerging markets offer three times more yield than those from developed nations, according to Bank of America Merrill Lynch data. The notes pay an average 4.1 percent, down from a six-year high of 11 percent reached October 2008, the data show. That compares with a near-record low yield of 1.37 percent on developed market bonds.
“The underlying reason why these notes are popular is investors are hunting for yield,” said Elbek Muslimov, head of credit trading for central and eastern Europe, Middle East and Africa at Citigroup Global Markets in London.
Investors in credit-linked notes can get even higher returns because they’re also exposed to the default risk of the bank issuing the securities.
JPMorgan’s $6 million of floating-rate notes tied to the Bahamas initially pay 4.1 percent and mature in December 2022. Marcelo Mota, a spokesman for JPMorgan in Sao Paulo, declined to comment on the securities.
The $51.3 million notes tied to Honduras pay 7.5 percent, replicating the coupon on the central American country’s $500 million of notes due 2024, according to data compiled by Bloomberg.
Natixis sold 3 million euros ($3.9 million) of 4 percent notes tied to Lithuania that mature in December 2021, the data show.
UniCredit SpA (UCG) raised 20 million euros ($25.7 million) last week from selling the first notes linked to Croatia’s debt since August 2011. The first tranche of three-year securities pay 3.15 percent, or 60 basis points more than yields on similar maturity Croatian government bonds, while the second offering of five-year notes was priced to yield 96 basis points more than the sovereign, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.
Silvia Lamberti, a spokeswoman for UniCredit, declined to comment on the bank’s sales.
A Mauritius-incorporated special-purpose vehicle sold the first note tied to the debt of Malawi since March 2010 this week. The African nation sold three-month treasury bills with an average yield of 30.4 percent on May 13, according to its central bank.
Brazil’s sovereign bonds are the most popular reference for structured notes this year, with banks led by JPMorgan selling more than $5 billion of securities tied to the country’s debt, according to data compiled by Bloomberg.
Private banks and wealthy individuals who may not be able to buy derivatives such as credit-default swaps are the main buyers of the notes. The securities tend to have higher yields and tailored maturities that may not be available in the bond market.
To contact the reporter on this story: Alastair Marsh in London at email@example.com