Structured products issuance slows after Donald Trump’s surprise win; agents price $251 million

By Emma Trincal

New York, Nov. 16 – The markets tumbled and then rallied as rates went up after the upset U.S. presidential election. But the U.S. structured notes market was notably quiet, according to data compiled by Prospect News.

Agents priced $251 million in the week ended Friday. There were only 92 offerings.

Post-election shock

“Investors are assessing the situation. Everybody has to reposition themselves. This election surprise has put people on hold, at least that’s my impression,” a structured products market participant said.

Stock market futures collapsed on Tuesday night when Donald Trump’s win was announced. But a sharp rally followed on Wednesday and Thursday leading the S&P 500 index to a 3.8% gain for the week. Since then, stock prices have been mixed.

“The elections result was a big surprise. The fact that the market recovered so fast was also surprising,” said a sellsider.

“I’m not sure why volume was slow last week. People are still trying to digest.

“Short-term, people may equate Trump with more economic growth. There may be a short-term stimulus with lower corporate taxes. Companies may be incentivized to move back money to the economy. That’s good for the dollar.

“But longer-term you may also see a big deficit with higher inflation. This was already built in last week with bond yields moving up.”

The 10-year Treasury yield jumped from 1.83% the day before the elections to 2.15% on Thursday. The market was closed on Friday in observance of Veterans Day.

Uncertainty

“No one knows what Donald Trump is going to do. He has the Congress, so things will get done,” the sellsider said. “But you never know what the market really wants. Before the elections, the market wanted inaction. Now it’s exactly the opposite.

“The market is just blindly resilient. That leaves a lot of room for interpretation.”

Last week accounted for the fifth smallest weekly issuance volume of the year, according to the data.

“Nobody is going to want to buy notes for a week or two, until things settle,” the market participant said.

Small deals

The modest size of the top deals was also a sure sign of weakness.

GS Finance Corp.’s $25.85 million of two-year leveraged notes tied to the S&P 500 index was the top offering.

The payout at maturity offered 150% of the index return up to a 20.20% cap. Investors benefitted from a 10% geared buffer on the downside with a 1.11 multiple. The notes were guaranteed by the Goldman Sachs Group, Inc.

More notable for its lookback feature was the second offering. Barclays Bank plc priced $13.15 million of 15-month lookback entry Performance Leveraged Upside Securities linked to an equally weighted basket of the Russell 2000 index and the S&P 500 index. The agent was Morgan Stanley & Co. LLC. At maturity, investors received uncapped upside with a two-time leverage factor. The downside was not protected, but the structure offered a lookback allowing investors to lock in, as the initial price, the lowest closing level of the basket from Nov. 7 to Nov. 11 included.

“It’s only a few days. It’s almost like there’s no lookback. But it covers the elections, so maybe people wanted the lookback because of the uncertainty,” the sellsider said.

Morgan Stanley priced a similar but larger offering in the previous week. Barclays’ $39.42 million also showed a lookback covering the elections but over a longer period from Oct. 31 to Nov. 14.

The third deal was also issued by GS Finance. It was $11.95 million of two-year digital notes linked to the S&P 500.

Investors received a digital payment of 10.65% if the index finished at or above 85% of the initial price. The 15% protection was delivered via a geared buffer with a 1.1765 multiple.

Year to date

Volume for the year is down 15.65% to $32.47 billion from $38.50 billion, according to the data.

“The beginning of the year was very bad. But volume has been picking up. A recovery came in the summer,” the sellsider said.

The Department of Labor’s fiduciary rule announced in April played a part in slowing down the business, the market participant said.

“A lot of people needed to assess the impact of this regulation coming into effect in April 2017. Now more people had a chance to understand it and to incorporate it in their offerings.”

Small autocallables

An unusually high amount of tiny autocallable reverse convertibles hit the market last week. Agents sold $94 million of such products in 57 deals, which made for 38% of the total volume, a market share much higher than the annual average of 25%.

UBS was a major contributor to this trend, pricing $30 million in 35 deals, a less-than $1 million average deal size.

“Rates have gone up last week, but honestly we’re still in a low interest rates environment. Even if the Fed raises rates, it’s still almost zero,” said the market participant.

“If the higher rates trend continues, maybe we’ll see the launch of new products.

“But for now the demand for coupon-bearing or contingent-coupon-paying notes will stay with us for some time.

“If we had 5% yields, it would obviously be a different environment.

“But that’s not where we’re at now, and if you’re willing to take some equity risk, you’ll be compensated with higher coupons.”

The top agent was Goldman Sachs, with three deals totaling $51 million, or 20.2% of the total. It was followed by JPMorgan and HSBC.

“The elections result was a big surprise. The fact that the market recovered so fast was also surprising.” – A sellsider

“If the higher rates trend continues, maybe we’ll see the launch of new products. But for now the demand for coupon-bearing or contingent-coupon-paying notes will stay with us for some time.” – A market participant

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