Structured Note Sales Fall Below Average as Interest Rates Drop

Bank sales of structured notes in the U.S. fell below the year’s average in May, after excluding the largest deal since 2010, as record-low interest rates made it more difficult to create attractive products.

Banks issued $4.12 billion of the securities last month, though the total was skewed by UBS AG’s offering of a $946.2 million note that was the largest tied to equities in at least two years, according to data compiled by Bloomberg. After excluding that note, May sales of $3.16 billion trail the yearly average of $3.54 billion.

“Interest rates went to the basement,” which has made creating some new products “tougher,” Alexandre Ecot, a director at Societe Generale SA’s group that sells derivatives and structured notes, said in a telephone interview.

The five-year swap rate, which serves as a benchmark for borrowing costs, averaged 1.09 percent in May, the lowest level on record. Falling rates can make it challenging for banks to create alluring structured notes, because the zero-coupon bonds that are combined with derivatives to construct the customized bets become more expensive to buy.

Banks sold $4.52 billion of notes in March, the most this year, when five-year swaps averaged their highest level in 2012, 1.25 percent, Bloomberg data show.

A rise in market volatility also contributed to the difficulty in putting together some notes, such as those that have no capped return, because the options embedded in the products became more costly, Ecot said.

VIX Rises

The VIX, as the Chicago Board Options Exchange Volatility Index is known, averaged 21 in May, the highest level so far this year and up from 17.8 in April, Bloomberg data show. The gauge measures the cost of using options to protect against declines in the Standard & Poor’s 500 Index.

Fisher Asset Management LLC bought the largest note last month, the May 16 offering of one-year securities tied to the Russell 1000 Growth Index that UBS issued. The securities yield twice the gains and losses of the index, which provides a way for investors to bet on companies with the fastest earnings growth.

While banks in May sold $407 million of notes linked to interest rates, the least since December, issuance of foreign-exchange linked was the highest since September, at $184.3 million, Bloomberg data show. Four of the five largest deals were tied to bets on the U.S. dollar versus the Chinese yuan. JPMorgan Chase & Co. underwrote $71 million of currency-linked securities in 12 offerings, the most of any bank, Bloomberg data show.

Structured notes are securities created by banks, which package debt with derivatives to offer customized bets to investors while earning fees and raising money. Derivatives are contracts whose value is derived from stocks, bonds, currencies and commodities.

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