Structured Note Buyers Favor Stocks Over Indexes in Yield Hunt

Investors are shifting to structured notes linked to stocks rather than equity indexes as they seek to boost earnings by taking on more risk, according to Deutsche Bank AG.

More than $545 million of notes tied to equities led by Apple Inc. (AAPL) and Bank of America Corp. were sold in the U.S. in May, according to data compiled by Bloomberg, the first time since February 2011 the two largest equity-tied structured notes tracked single stocks. In Europe, Deutsche Bank said it doubled sales of notes referencing individual companies this year.

“The move from indexes to single stocks is a strong indicator of growing risk appetite,” said Nicolas Traissac, who heads Deutsche Bank’s equity derivatives business in Europe, the Middle East and Africa. “Investors are more willing to climb the ladder of complexity.”

Structured notes linked to individual stocks are susceptible to greater price swings than equity indexes, so they tend to offer higher coupons than those tied to benchmarks. Investors are being encouraged to buy riskier assets as global central banks flood financial markets with cheap cash, according to Deutsche Bank.

Securities tracking indexes typically dominate issuance of equity-linked structured notes in the U.S. and Europe. Of the $10.8 billion sold in the U.S. this year, $3.1 billion reference the Standard & Poor’s 500 Index (SPX), $1 billion follow the Euro Stoxx 50 Index (SX5E) and $890.6 million track the Russell 2000 benchmark, Bloomberg data show.

Apple Stock

Bank of America sold $148 million of one-year securities tied to Apple in the biggest equity-linked offering this month, according to Bloomberg data. Investors in the notes earn three times any gains in the stock, with returns capped at 27.65 percent, while losses mirror any share price drop, according to a prospectus filed with the U.S. Securities and Exchange Commission.

Implied volatility for three-month options on Apple is 1.9 times higher than the level for the Technology Select Sector SPDR Fund (XLK) and double that of the S&P 500 Index, according to the latest data compiled by Bloomberg through May 24.

When volatility is high, options embedded in certain structured notes, such as reverse convertibles, become more valuable. That enables issuers to create securities with more attractive terms.

German insurer Allianz SE (ALV) is among the most in demand reference entities for structured notes sold in Europe, according to Deutsche Bank. A measure of volatility for the Munich-based company has climbed to 21.7 from 16.9 on May 7, the lowest level this year.

Implied volatility for Deutsche Telekom AG (DTE), another popular pick, has reached a near five-year high compared with the Euro Stoxx 50 index.

To contact the reporter on this story: Alastair Marsh in London at amarsh25@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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