Structured Note Investors Seek Longer Maturities to Boost YieldsAlastair Marsh
Banks are selling more longer-dated structured notes as investors accept greater risks in a bid to boost returns that have been hurt by interest rates close to zero and declining funding costs for lenders.
Banks led by DZ Bank AG and UniCredit SpA sold $3.47 billion of notes with maturities exceeding five years this month, or 87 percent of the $3.97 billion of global issuance, according to data compiled by Bloomberg that excludes U.S. securities and those where the principal returned can vary. That compares with 68 percent for 2012 and 54 percent for 2011, the data show.
Investors can receive higher returns by locking up their money for longer periods. The option has become attractive as credit-default swaps for European and U.S. banks, the main sellers of structured notes, declined to their lowest level in as much as 21 months in January, curtailing the extra returns investors can achieve from buying the notes of riskier issuers. Low rates in Europe and the U.S. have also damped yields.
“There is no yield in shorter tenors,” said Sharif Nahas, vice president of structured products sales at ING Groep NV in Frankfurt. “The funding of banks is higher in longer tenors, and so yield levels are normally also higher.”
DZ Bank AG, the largest issuer of structured notes this year, sold 50 million euros ($66.6 million) of eight-year callable step-up coupon securities on Jan. 2 that initially pay 1.4 percent annually, then increase to a final rate of 2 percent. The Frankfurt-based lender also issued a similar 10-year note on the same day that pays a final coupon of 2.6 percent, Bloomberg data show.
Interest rate volatility is almost at a two-year low, which has also cut potential returns on notes, encouraging investors to seek longer maturities, said Phil McCabe, who is responsible for structured notes at Lloyds Banking Group Plc in London and heads collateral and repo trading.
The so-called 3m10y swaption rate, a measure of volatility in three-month options for 10-year euro interest-rate swaps, stands at 64.1 basis points today, having hit 57 on Dec. 6, the lowest point since April 2010.
In addition, insurance companies in Germany and Taiwan are among the main buyers of global structured notes and prefer longer-dated notes, said Amaury Gosse, a London-based medium-term notes trader at Citigroup Inc.
Elm BV, an Amsterdam-based special purpose entity, sold the note with the longest maturity this year, Bloomberg data show. The callable 30-year security, which was issued on Jan. 14, is tied to a French government bond and will pay a maximum return of 370.25 percent if not redeemed early. UBS AG arranged the sale.
The average years to maturity of company bonds from the U.S. to Europe and Asia hit a 12-year high of 8.54 on Aug. 2, according to Bank of America Merrill Lynch’s Global Corporate Index. Today the measure stands at 8.37 years.