Structured Notes Tied to Euro Stoxx 50 Surge on More Volatility

Sales of U.S. structured notes tied to the largest euro-area companies surged to the second-highest monthly total in at least three years.

Banks sold $388 million of securities linked to the Euro Stoxx 50 Index in February, almost three times as much as in January, according to data compiled by Bloomberg. The benchmark is now the second-most popular for U.S. structured notes this year, after the Standard & Poor’s 500 Index.

Yields on 10-year Italian and Spanish bonds, which last year rose above 7 percent, have fallen about 2 percentage points since European Central Bank President Mario Draghi in July pledged to do whatever it takes to save the euro, calming investors. At the same time, the European stock index has higher volatility than U.S. benchmarks, Bloomberg data show, allowing for notes to be constructed that pay better returns.

Investors may view the Euro Stoxx 50 as lower risk though than an index such as the Russell 2000 because it’s made up of companies with larger market capitalizations, said John Tessar, senior vice president at JVB Financial Group LLC in Boca Raton, Florida.

The implied volatility of the Russell 2000, as calculated by looking at three-month at-the-money options on its stocks, was 15.72 yesterday, compared with 17.65 for the Euro Stoxx 50.

Investors bought $753.1 million of notes tied to the European benchmark in September, the most monthly sales since 2010 when Bloomberg began collecting comprehensive data on U.S. structured notes. Draghi announced an unlimited bond-buying plan to support the euro on Sept. 6, backing up his July pledge to defend the single currency.

Since the plan for so-called Outright Monetary Transactions was revealed, the Euro Stoxx 50 has gained 10 percent.

‘Market Run’

“The overall equity market run coupled with prolonged low interest rates certainly can ‘spur investment,”’ said Jim Kaiser, president of FMG Distributors Inc., a securities brokerage in Norwalk, Connecticut. Still, some financial advisers tend not to buy notes linked to the index because they “have longer memories,” he said, referring to the European sovereign credit crisis.

The largest offering linked to the Euro Stoxx 50 Index last month was $42.5 million of 14-month notes sold by Barclays Plc. The securities, issued Feb. 21, yield three times the gains of the index up to 21.6 percent with all capital at risk, according to a prospectus filed with the U.S. Securities and Exchange Commission. Bank of America Corp. distributed the notes for a 2 percent fee.

Total Sales

Banks sold $69.8 million of notes in five offerings linked to the index that are converted to dollars, exposing investors to fluctuations in the exchange rate, Bloomberg data show. The euro has fallen 1.7 percent against the dollar this year to $1.2967 as of yesterday.

U.S. structured notes most often link to the S&P 500, Bloomberg data show. Investors bought $1.37 billion of such securities this year through February.

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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