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Fiscal Cliff Uncertainty Slowed Structured Note Sales in U.S.

Sales of structured notes in the U.S. dropped about 78 percent during the final week of the year as the possibility of Congress failing to agree on a budget deal constrained issuance.

Investors bought $213.6 million of the securities in the five days ended Dec. 28, down from $968.7 million in the previous period, according to data compiled by Bloomberg. Banks sold $2.08 billion of structured notes in December, the slowest month since January 2010, when Bloomberg began collecting comprehensive data on the securities registered with the U.S. Securities and Exchange Commission.

The prospect of the so-called “fiscal cliff,” more than $600 billion in tax increases and federal spending cuts set to automatically take effect tomorrow if a deal is not reached, contributed to the December slowdown, said Deryk Rhodes, vice president of structured product trading at Incapital LLC in Boca Raton, Florida.

“Some people are definitely holding off,” he said. “I’ve had a few clients say, ‘Hey, I’m interested. I’m just going to pull the trigger next week.”’

President Barack Obama said today an agreement to avert the fiscal cliff appeared to be “within sight.”

December is traditionally a slow time for sales, said John Tessar, senior vice president at JVB Financial Group LLC in Boca Raton, Florida.

“It’s that time of year when people take their vacations and very little gets done,” he said. “Unfortunately it’s an expected and self-fulfilling prophecy.”

During the comparable week in 2011, investors bought $535.2 million of structured notes in the U.S., 37 percent less than the previous period, Bloomberg data show.

Biggest Offering

Deutsche Bank AG sold $22.6 million of five-year auto-callable notes linked to the stock price of Apple Inc., the largest offering last week. The securities, issued Dec. 27, yield 10 percent a year as long as the share price doesn’t fall below 65 percent of its initial value, according to a prospectus filed with the SEC. The German bank can call the notes monthly after one year. UBS AG distributed the securities for a 2.5 percent fee.

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 whose value is derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

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