Structured Notes Rise to Four-Year High on Europe Stocks

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Issuance of U.S. structured notes last quarter climbed to the most since the beginning of 2011, driven by demand for securities tied to international stock indexes that eliminate currency risk.

Banks sold $12.9 billion of notes in 2,182 offerings during the first three months of the year, up 6 percent from the same period a year earlier, and the highest issuance since the first quarter of 2011, according to data compiled by Bloomberg based on filings with the Securities and Exchange Commission.

Investors are looking for returns abroad, where accommodative central-bank policy has lifted valuations. The Euro Stoxx 50 Index is up 20 percent this year on the European Central Bank’s 1.1 trillion-euro ($1.2 trillion) bond-buying plan, compared with a 1 percent gain in the Standard & Poor’s 500 Index as the Federal Reserve winds down programs that helped share prices triple since 2009.

“The European Central Bank is just beginning its quantitative easing program,” said Steven Skancke, chief investment officer at Vienna, Virginia-based Keel Point Advisors LLC, who has bought notes tied to European and emerging market indexes. “We believe the European equity markets will be a principal beneficiary and by extension emerging markets as well.”

U.S. notes linked to international indexes typically use options that remove the effect of currency conversions, allowing investors to avoid the risk of reduced returns when they convert their profit back. The euro has fallen 22 percent against the dollar over the past year.

Euro Stoxx

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.

The Euro Stoxx 50 Index was the second most-popular linked asset in the first quarter, with $1.8 billion of notes. That’s up 14 percent from the same period a year earlier and the most since at least 2010. Still, the S&P 500 Index remained the most popular index.

The increase in sales of securities tied to the Euro Stoxx 50 helped boost total market share this year for three of the four biggest issuers of U.S. structured notes -- Goldman Sachs Group Inc., Barclays Plc, JPMorgan Chase & Co. -- while Credit Suisse Group AG fell, according to Bloomberg data. The top four banks made up more than half of all issuance for the first time since 2010, the data show.

‘Very Active’

Private banks and large brokerages “generally have been very active,” said Scott Mitchell, managing director and head of equity-derivative sales for North America at JPMorgan, which sold the third-most notes in the first quarter.

Bank of America Corp., the fifth-biggest issuer this year, had a 76 percent increase from the year-earlier period to $1.34 billion, the biggest jump among sellers. The Charlotte, North Carolina-based lender had dropped to the 10th largest issuer in 2014.

Susan McCabe, a spokeswoman for Bank of America, declined to comment on structured-note sales.

The average size of each note offering climbed to $5.91 million in the first quarter, the highest since the beginning of 2011, Bloomberg data show.

Barclays had the largest note sale of the year on Jan. 30, which was tied to the Euro Stoxx 50, FTSE 100, and Topix. The notes offer twice the gains of each index that rises, subject to a cap of 21.14 percent, with all principal at risk if the indexes fall, according to a prospectus filed with the Securities and Exchange Commission. JPMorgan placed the $547.6 million of notes for a 1 percent fee.

Mark Lane, a spokesman for Barclays, declined to comment on the notes.

Sales jumped in the first quarter of 2011 as investors used structured notes to make bets on interest rates following a decision by the Fed to begin its second round of bond-buying.

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