Investors are on course to buy more than $10 billion of U.S. structured notes tied to the Standard & Poor’s 500 Index in 2012, the most in at least three years.
Issuance of the securities has averaged $882.4 million a month through October, 8 percent more than last year, according to data compiled by Bloomberg. Notes tied to the index, which is the most commonly linked asset for U.S. structured notes, account for more than one-quarter of total sales.
Banks sold more of the securities this year even as total issuance slowed 17 percent to $35.1 billion as of Nov. 28, Bloomberg data show. The S&P 500 Index has returned 12 percent this year, compared with 2.5 percent for U.S. Treasuries.
Equity benchmarks like the S&P 500 Index have attracted investors because they are outperforming the “puny yield” of bond markets, said Ken Barrett, managing director and head of U.S. rate sales at Bank of Nova Scotia in New York, in a telephone interview.
The lower returns on debt have resulted from the U.S. Federal Reserve’s third round of asset purchases, known as quantitative easing, and the extension of “Operation Twist” this year, which pushed out the maturities of bonds on the central bank’s balance sheet, he said.
Bank of America Corp. sold $130.5 million of 14-month notes on Sept. 27, the largest offering tied to the index this year. The securities pay three times the gains of the benchmark, capped at 16.14 percent, with all capital at risk, according to a prospectus filed with the U.S. Securities and Exchange Commission. The bank distributed the notes for a 2 percent fee.
Banks issued $9.79 billion of S&P 500-tied notes in the U.S. last year and $8.3 billion in 2010, which is when Bloomberg began collecting comprehensive data on SEC-registered securities.
Structured notes are created by packaging debt with derivatives to offer customized bets to individual investors. Derivatives are contracts whose value is derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.