Structured products issuance reaches $304 million for week, a decent size to begin the month

By Emma Trincal

New York, Jan. 11 – Agents sold 118 deals last week totaling $304 million, a decent start for the year in a shortened holiday week. During the past three years, the initial week showed a volume in a $400 million to $580 million range, according to data compiled by Prospect News.

Average weekly volume last year was $750 million. But this included each bulky week at the end of the month.

“In general people continue to have a positive outlook on equities, so it’s a good thing,” an industry source said.

Given the size of the largest deals last week, however, he ruled out the presence of significant rollovers.

“Redemptions and reinvestments are a good driver behind volume. Size automatically increases when you have a larger deal,” he said.

Top deals

Indeed last week’s top deals were small in size, according to the preliminary data compiled by Prospect News.

The first one was Barclays Bank plc’s $25.6 million of two-year callable contingent yield notes linked to the S&P 500 index, the Russell 2000 index and the Euro Stoxx 50 index.

It was a worst-of structure. The notes paid a contingent quarterly coupon at an annual rate of 9.5% if each index closed at or above its barrier, 65% of its initial level. The barrier was based on an American option as it can be breached on any trading day during the observation period for that quarter. The notes were callable on each quarterly observation date.

The barrier at maturity was also 65% on a point to point basis. Investors were fully exposed to the worst performing index.

UBS Financial Services Inc. and Barclays were the agents.

“It’s kind of a short deal. Not that bad for someone who really wants some yield,” said a market participant.

“That’s someone willing to accept the three indices instead of two, someone who can tolerate the American barrier, all that to boost the return. They want the yield but they don’t want to go out too long. Not the most conservative play.”

HSBC barrier deal

JPMorgan distributed the second deal on the behalf of HSBC USA Inc., an 18-month issue of $19.22 million notes linked to the S&P 500 index. Investors were offered a one-to one upside participation in the index while a 77.75% barrier provided a contingent protection on the downside.

“This one is a little bit more conservative,” the market participant said.

“Someone wants to take an 18-month exposure to the market. Definitely a bullish move with some protection...Investor says I’d rather give up the dividend for that 22% contingent protection. Personally I’d go with a buffer, but buffers are expensive.”

Rally

Agents priced notes amid a continued post-elections rally with the S&P 500 index up 1.70% for the week and reaching a new record high along with the Nasdaq. Since the November elections through Friday, the S&P 500 index has gained nearly 7%. The Dow Jones industrial average last week continued to get close while missing the 20,000 mark, a sign that if investors may still be upbeat, they have also become more careful as signs that the market is topping abound, he said.

The job report released Friday showed wage growth, which gave more credence to the Federal Reserve’s announcement that it will be more hawkish this year.

Less momentum

“I think investors are becoming a little bit more cautious because you had a big run up at the end of last year on the Trump [election],” the market participant said.

“I talk to advisers who are turning more neutral. They think we need to get a pullback before going back in.”

Investors in structured notes need to keep an eye on rates, he said, citing bond guru Bill Gross, who earlier this week warned about the risks of a bond sell-off if the 10-year Treasury moved above a 2.60% threshold.

Gross, bond manager at Janus Capital, said that this yield level was “key” not just for bond prices but for stocks as well.

“It’s something to pay attention to whether you think it’s true or not,” the market participant said.

The market is at a junction, he added. The bond sell-off could accelerate, which would mark a break from a long period of low interest rates. Alternatively, some investors may see the bond sell-off as overdone and yields could move back downwards. Since its peak in the middle of December, the 10-year yield has fallen to 2.35% from 2.57%.

“We had a risk-on moment at the end of last year. People were selling Treasuries, buying the growth story. Stocks went up; bonds sold off,” the market participant said.

“We could have stocks a bit overbought now and bonds oversold. It would be a little bit natural to see a reversal.”

Follow the money

The uncertainty may help or hurt issuance volume depending on how fast investors need to make investment decisions, he said.

“Right now stocks are up. I know advisers who want to buy deals now when the market is up. The idea is: better buy now and get some downside protection,” he said.

“But a lot of the time, people want to see where the market is going. If the guy can wait before putting cash to work, then it’s not so good for the firms.

“But most guys want to put money to work right away so at the end of the day I think it’s positive for the business.”

The top agent was Barclays with nine deals totaling $70 million, or 23.1% of the market. It was followed by JPMorgan and HSBC.

“In general people continue to have a positive outlook on equities, so it’s a good thing.” – An industry source

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