Sales of Structured Notes Tied to Rates Tumble to Four Year-Low

Monthly sales of structured notes tied to interest rates fell to an almost four-year low last month as issuance of securities that pay a fixed coupon plunged.

Banks sold $223.2 million of U.S. rate-linked notes in October, about half the total from a year earlier and the lowest sales since January 2010, when Bloomberg started to collect comprehensive data on the securities. Issuance of callable notes that have fixed, “step up” coupons dropped by about 80 percent, to $75.1 million.

Investors shied away from buying the securities as job growth slowed in September, the federal government partially shut down and the yield on the 10-year Treasury bond’s yield dropped to 2.5 percent on Oct. 23 from a September high of 2.99 percent. Lower rates depressed the amount that banks could offer on fixed-coupon notes.

Fed officials “don’t want to see rates go significantly higher,” Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, said in a telephone interview today. “It would be a drag on the economy, notably the housing market.”

Janet Yellen, nominated by President Obama to become the next Fed chairman, voiced her commitment to using bond purchases known as quantitative easing, according to prepared testimony for her nomination hearing before the Senate Banking Committee in Washington today. The stimulus program is intended to boost growth and lower unemployment that remains above 7 percent more than four years after the economy began to recover from the deepest recession since the Great Depression.

Libor Leads

Banks sold $4.1 billion of rate-linked notes this year through October, the slowest such period since 2010, Bloomberg data show. Issuance has rebounded somewhat in November to $216 million in the first two weeks, on a pace to exceed the year’s monthly average.

Libor-tied notes are selling the best in 2013, making up $1.88 billion of volume during the first 10 months. They pay a coupon above the London interbank offered rate, so investors receive more in the event rates increase, though that may not happen soon.

The U.S. central bank will delay starting to reduce its $85 billion a month in bond buys until March, according to the median estimate of 40 economists surveyed Oct. 17-18, after a 16-day partial government shutdown endangered the four-year economic expansion.

RBC Notes

On Oct. 18, Royal Bank of Canada sold $30 million of 12-year callable, step-up notes, the largest offering tied to rates last month. The securities yield 3 percent for the first five years, then increase twice to pay 5 percent for the final two, according to a prospectus filed with the U.S. Securities and Exchange Commission. The bank can first redeem the notes after five years.

Sanam Heidary, a spokeswoman for RBC in New York, declined to comment on the notes.

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 with values 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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