Banks Issue Least Credit-Linked Notes for Any July Since 2001

Sales of credit-tied structured notes dropped to a 12-year low for July as investors shunned the securities while preparing for an eventual end to unprecedented central bank stimulus.

DZ Bank AG, Societe Generale SA and Deutsche Bank AG led $1.7 billion of issuance of the securities last month, about half of the $3.2 billion in the same period last year and the least since the $873 million of sales in 2001, according to data compiled by Bloomberg. The securities are linked to the creditworthiness of companies and countries, from Italian utility Enel SpA to Sri Lanka.

Federal Reserve Chairman Ben S. Bernanke’s remarks in May that stimulus from the U.S. central bank won’t continue indefinitely sparked a flight from fixed-income assets. Investors are still wary of credit-tied notes, which aren’t actively traded, as they pause to consider the consequences of an easing of monetary policy even as Bernanke said in July that the central bank’s position will remain accommodative.

“With the Fed now talking about tapering, there is a feeling that fixed income will not do so well in this environment and maybe we will even see a rotation into equities,” said Nordine Farsi, head of structured credit trading at Landesbank Baden-Wuerttemberg in London. “This has curtailed demand for credit-linked notes.”

‘Curtailed Demand’

The private banks and wealthy individuals ranking among investors in the securities typically hold them until maturity and are reassessing whether they want to own the notes during the next few years, Farsi said. The notes failed to benefit from a surge of investor demand in July for global corporate bonds, which returned 1.02 percent on average after losing 2.45 percent in June, according to Bank of America Merrill Lynch index data.

U.S. bond mutual funds attracted $2.1 billion last week, marking the first inflows in almost two months, according to the Investment Company Institute.

Bernanke told Congress on May 22 that the Fed may reduce the pace of its $85 billion of monthly bond purchases of Treasuries and mortgage bonds if the economy showed sustained improvement. On July 17, he said the central bank would maintain a “high degree” of monetary accommodation.

Banks typically sell less structured notes in July than in other months because of the U.S. and European vacation season, said William Sjoberg, a senior analyst for structured products at Nordea Bank AB in Stockholm. Through the first seven months, the bank had its best year on record for selling credit-linked notes, issuing $1.1 billion of the securities, according to Bloomberg data.

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