JPMorgan, Harris launch CDs; persistent concerns about banks, low rates help wrapper thrive, adviser says

By Kenneth Lim

Boston, March 3 - Structured certificates of deposit continue to be attractive for investors amid low interest rates and concerns about the stability of issuing banks, an investment adviser said.

A number of issuers have been offering structured CDs over the week.

JPMorgan Chase Bank, NA plans to price zero-coupon knockout CDs due March 30, 2012 linked to the price of gold.

If the gold price is greater than the knock-out level on any trading day during the life of the CDs, then the payout at maturity will be par. Otherwise, the payout will be par plus any increase in the price of gold, subject to a maximum return.

The knock-out level is expected to be at least 150% of the initial gold price, and the maximum return will be at least 50%. Both will be set at pricing.

JPMorgan also launched 0% CDs due March 31, 2014 linked to the JPMorgan Efficiente (USD) index.

The payout at maturity will be par plus at least 100% of any gain in the index, with the exact participation rate to be set at pricing. Investors will receive at least par.

Harris NA plans to price zero-coupon principal protected CDs due March 31, 2014 linked to the PowerShares QQQ Trust Series 1 exchange-traded fund.

The payout at maturity will be par plus 5% plus the ETF interest amount, which will equal the product of the ETF returns for the 20 quarters making up the life of the CDs minus 5%. The return in each quarter will be capped at between 4% and 8%, with the exact cap to be set at pricing.

Harris is also offering contingent annual payout CDs due March 31, 2015 linked to a basket of 10 stocks.

The basket comprises equal weights of Wells Fargo & Co., General Electric Co., Burlington Northern Santa Fe Co., The Coca-Cola Co., ConocoPhillips, Johnson & Johnson, Kraft Foods Inc., Pfizer Inc., The Procter & Gamble Co. and Google.

On each anniversary of the CDs, investors will receive a coupon equal to the sum of 1/10th of each component stock's return, subject to a return cap of 12%. The minimum coupon is zero. Investors will receive their principal plus the final coupon at maturity.

CDs still thriving

Investors continue to be interested in structured CDs as banks' creditworthiness remain shaky, the investment adviser said.

"My clients, those who are willing to invest again, are mostly still looking at CDs," the adviser said.

"The bottom line is I'm still concerned about the quality of the credit of the issuers. Is there going to be another Lehman Brothers? Probably not. Is it worth the risk? The potential returns that you'll get on CDs isn't that different from what they're offering on similar notes.

"A CD linked to an index is getting the same kinds of terms as a principal-protected note from JPMorgan. The notes, so far, don't compensate you enough, in terms of better returns or protection, they don't compensate you enough for the additional risk that you're taking on.

"I think it's a no brainer. Between a CD and a note, all else being equal, I'll take the CD."

Structured CDs also benefit from the current low interest rate environment, the adviser said.

"I think structured CDs are especially interesting now because a plain vanilla CD won't get you much," the adviser said. "If you want to get a decent return in today's environment, you won't be satisfied with something that just pays you 3% per year, although compared to actually losing money that looks great.

"But a structured CD really gives you a bit of both worlds. You get FDIC-insured principal protection so you don't have to worry much about your capital, and you can seek a better return by linking your return to some market. Yes, it's a little riskier than the plain vanilla CD, but it's not an exceptional amount of risk to take for a potentially slightly better return."

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