Structured Note Rate-Tied Sales Slow to Lowest in Three Years
Investors bought $2.75 billion of structured notes in the U.S. last month, a 17 percent decline from October, led by the slowest month for sales of notes linked to interest rates in three years.
Rate-tied issuance dropped to $232.3 million, less than half of the $491.9 million monthly average this year, according to data compiled by Bloomberg. November was the second-lowest month for total sales of structured notes in 2012.
Historically low interest rates have made selling corporate debt more attractive, while limiting the returns that structured notes can offer because the zero coupon bonds that make up the securities become more expensive. Corporations sold a record $386.7 billion of bonds in November, looking to refinance and take advantage of the low cost of borrowing last month, Bloomberg data show.
Financial advisers to individual investors “aren’t looking toward us right now,” said John Tessar, senior vice president at JVB Financial Group LLC in Boca Raton, Florida. He said they’re focusing on their clients’ stock portfolios because of potential tax increases related to the so-called fiscal cliff rather than buying debt instruments such as rate-linked notes.
Outside the U.S., banks had the lowest monthly sales of the year. DZ Bank AG, JPMorgan Chase & Co. (JPM) and Deutsche Bank AG (DB) led with issuance of $4.77 billion, 30 percent lower than last month, Bloomberg data show. Standard Chartered Plc had the largest offering, $210 million of credit-linked notes on Nov. 27.
The Federal Reserve’s asset purchasing programs have kept shorter- and longer-term interest rates historically low, said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.
“The Fed is basically a gigantic anchor on the entire yield curve,” he said in a telephone interview.
The Federal Open Markets Committee in October voted to continue buying $40 billion in mortgage bonds each month, to fuel economic growth and reduce 7.9 percent unemployment.
After a two-day meeting on Oct. 24, the FOMC said it expects to keep the federal funds rate exceptionally low through at least mid-2015, repeating a pledge from Sept. 13.
Bank of America Corp. sold $123.9 million of two-year notes tied to the value of the Standard & Poor’s 500 Index, the largest offering last month. The securities, sold Nov. 29, yield three times the gains of the index with a 19.25 percent cap while investors risk losses in lockstep with the gauge, according to a prospectus filed with the U.S. Securities and Exchange Commission. The bank distributed the notes for a 2 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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