First-Half Structured-Note Sales Fall Amid Low Volatility, Rates

Structured-note sales fell during the first half of the year in the U.S. and Europe, as lower stock volatility and interest rates left issuers struggling to offer attractive terms.

U.S. issuance dropped to $20.2 billion during the period, 6 percent less than last year and the least for the first six months since the start of 2010, when Bloomberg began collecting comprehensive data on the securities. European banks sold $41.7 billion of the securities, the slowest start in 10 years, Bloomberg data show.

Investors bought fewer securities in the U.S. because features that clients “embrace,” such as protection against losses, weren’t as favorable as in the past, said Tom Balcom, founder of 1650 Wealth Management, a Lauderdale-by-the-Sea, Florida, investment adviser.

“The two key components for structured notes are volatility and interest rates,” he said in a telephone interview. Higher levels of both allow issuers to sweeten product terms, such as for the size of coupons or the amount of leverage on gains.

Stock volatility during the first half, as measured by the Chicago Board Options Exchange Volatility Index, averaged 14.23, the lowest since 2007. Europe’s VStoxx Index, a gauge of Euro Stoxx 50 Index option prices, averaged 19.14 this year through June 30, down from 27.31 during the same period in 2012.

Treasury Rates

Rates and volatility increased after Federal Reserve Chairman Ben S. Bernanke said on June 19 that the central bank may slow its $85 billion a month in securities purchases by the end of the year. Ten-year Treasuries yielded an average of 1.88 percent this year through the end of May, then the rate surged to 2.61 percent on June 25, the highest in almost two years.

Banks sold $2.8 billion of U.S. structured notes last month, a 22 percent drop from May, and the slowest such period since December, according to data compiled by Bloomberg.

Outside the U.S., excluding notes where the amount of principal returned can vary, issuance totaled $5.28 billion, 29 percent less than the $7.39 billion sold in May.

While sales of U.S. notes linked to rates declined 5.9 percent from the same period last year, securities tied to equities have climbed 7 percent, to $14.3 billion.

Biggest Offering

Bank of America Corp. issued $284.5 million of five-year notes tied to the Dow Jones Industrial Average, the biggest offering since Sept. 14, 2012. The securities, issued June 27, yield 1.22 times the gains of the benchmark with protection against 30 percent of losses, according to a prospectus filed with the U.S. Securities and Exchange Commission. The bank estimated the note’s value at 4.4 percent less than what investors paid.

The Dow Jones index of the 30 largest U.S. companies rose 13.9 percent this year to 14,932.41 as of the close of trading yesterday.

Matt Card, a spokesman for the Charlotte, North Carolina-based bank, declined to comment on the note sale.

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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