Sales of structured notes in Europe and Asia suffered their worst month in 11 years in August amid investor concern the era of record low interest rates is coming to an end.
Banks sold $2.38 billion of structured notes through Aug. 29, the least for any month since February 2002, according to data compiled by Bloomberg, which exclude notes where the amount of principal returned can vary. The figure takes the total so far this year to $50.3 billion compared with $55.8 billion in the same period of 2012, the data show.
“Investors are hesitant because they know all the subsidized liquidity will eventually be drained from the system, and they are nervous about the implications, especially the potential for rising rates,” said Nordine Farsi, head of structured credit trading at Landesbank Baden-Wuerttemberg in London. “They are more cautious on fixed income at the moment, including credit-linked notes.”
Demand for structured notes in Europe and Asia started slowing in June after Fed Chairman Ben S. Bernanke signaled the central bank may reduce stimulus measures if the U.S. economy continued to improve. The lack of clarity around the Fed’s timetable for tapering has damped sales of longer-dated, fixed-rate notes, said Annemarie Ganatra, the global head of medium-term and structured notes at HSBC Holdings Plc in London.
Sales of notes tied to the creditworthiness of companies and countries fell to $688 million in August, the lowest since January 2004, according to data compiled by Bloomberg.
Banks typically issue fewer structured notes in July and August because of the summer holidays, said Charles Kermisch, a director of European credit and liquidity operations at Credit Suisse Group AG in London. The seasonal trend was exacerbated this year because banks were able to obtain cheap funds from central banks, reducing the amount they’re willing to pay buyers of structured notes, he said, which typically results in lower yields for credit-linked notes, making them even less attractive.