Structured products weekly tally $837 million amid volatile stock market, bond sell-off

By Emma Trincal

New York, Oct. 4 – Agents priced $837 million of structured products in 185 deals last week, according to preliminary data compiled by Prospect News, as September came to an end with a bumpy stock market, the S&P 500 index falling 4.6% last month.

There was no big offering, such as the recently seen synthetic convertibles or rate-linked note deals. Equity notes captured 90% of the total sold. The week was dominated by index underliers, which made for 81% of the notional with $680 million in 116 deals.

BofA, JPMorgan deals

The top index deals were tied to single underliers but an abundance of worst-of structures complemented the lot.

Canadian Imperial Bank of Commerce priced the top deal with $61.84 million of 14-month notes linked to the S&P 500 index. The payout was one-to-one capped at 10% on the upside and a 15% buffer with absolute return on the downside. BofA Securities was the agent.

BofA also priced on the behalf of this Canadian issuer $42.58 million of two-year notes paying 2x the gain up to 23.41% with a 10% buffer.

JPMorgan Chase Financial Co. LLC issued $36.81 million of one-year digital buffered notes, also on the S&P 500 index, paying 8.2% if the index finished at or above 85%, offering a 15% geared buffer on the downside.

The same issuer did another digital deal on the S&P 500 index for $33.07 million. The digital strike was at minus 20% setting a 20% geared buffer. As a result of the deeper protection, the digital payout was pushed down to 7.4%.

Autocalls, absolute return

Autocalls last week prevailed but their market share was smaller than usual with a third of the flow compared to 26% for leverage, 17% for digitals and 9% for absolute return.

Absolute return notes have come up more often in recent weeks as the stock market returns worsened. August and September were the two worst months of the year for stocks.

“I don’t think absolute return notes necessarily enjoy better pricing conditions right now. I think it’s driven by demand,” a sellsider said.

“Most structured products are created for a market that will be up or stable. Absolute return buyers are probably a bit concerned about the toppish market. They think it can’t go much higher, in fact there’s a good chance that it could go down. The view is that the market is going to move, that’s a given. We just don’t know if it will move up or down.”

Bumpy week

Last week’s stock market was volatile and finished flat except for the Dow Jones industrial average, which was down 1.3%.

Rising interest rates and continued inflation from higher oil prices put downward pressure on both stocks and bonds.

The sell-off was the most visible on the 10-year Treasury. On an intraday basis, its yield gained almost 20 basis points on Wednesday to 4.64%, noted an analyst. The yield rose since to 4.748% a week later. For some, the higher Treasury rates reflect the return of the “bond vigilantes,” requesting higher yields to finance the U.S. budget deficit.

With the 10-year rate rising so fast, the curve has begun to “de-invert.”

Despite the global bond sell-off, only one small rate deal was spotted last week in the form of a $1 million steepener issued by Barclays Bank plc.

A bond trader considered the lack of steepeners as an anomaly.

De-inversion

“The curve is getting flatter. We’re getting into a positive slope. It’s a good thing. Right now, we’re probably in a recession already,” he said.

The mean spread between the 10-year and two-year Treasury yields is 85 basis points, he said.

“We have been inverted since July 2022. Only a few weeks ago, that spread was at 70 bps. Now it’s at 32 bps.”

Steepener notes are nearly invisible as new issues, but this bond trader said they can be found as secondaries.

“The secondaries trade at deep discounts, in the 60’s sometimes. This type of paper will benefit from the steepening of the curve. You’re going to see a big boost in the secondary paper market.

“And yet, there are not a lot of them. Most people copy the same deals, the same autocalls, the same baskets.

“It’s hard to find anything creative in the equity-linked space or even with rate products,” he said.

VIX still muted

Despite the uncertainty in the markets, sources said the volatility continued to be surprisingly low.

“It’s troubling. I hope the market doesn’t blow up. Something is strange with volatility at these levels,” the sellsider said.

Currently at 19, the VIX index has increased from its 52-week low of last month at 12.68 but remains below average. Some predict a change.

“We have the 2024 Elections. That’s going to be a real problem for the stock market. At the end of the day, the economy is going to dictate the price of the stocks and the price of bonds,” the bond trader said.

Stocks

Stock underliers (single names and baskets) made for nearly 10% of the total last week.

Technology stocks, which drove the rally this year, dominated the flow as usual. With the low volatility, investors may be driven to those names to capture more premium for their income needs.

“If you need to enhance the coupon, you have to increase the risk,” the bond trader said.

“If you want Apple and Amazon in your basket, you add Tesla to the mix for instance or you decrease the barrier.”

Contingent coupons on indexes remain modest despite worst-of payouts or other features such as issuer calls, he added.

“I’d rather buy a stock with a 5% dividend than take the risk on a 7% autocall,” he said.

“The autocall gives me a 2% extra premium but I take much more risk. My coupon is at risk, my principal is at risk. In this market, I would stay away from those low-coupon autocalls.”

However, “there is still a place” for autocalls if one is not entirely focused on the coupon, he added.

“You own good-quality stocks like Apple or Amazon. They’re sitting in your portfolio, and you don’t want to sell the position. You can hedge it and put together an autocall. At least you’re protecting your portfolio and you’re getting some income. There’s a place for autocall paper as a hedge strategy,” he said.

Leveraged return

Leverage was popular last week. But on a year-to-date basis, issuance volume for this structure has dropped 23% to $13.5 billion from $17.6 billion.

Some market participants blame the progress of buffer ETFs, which compete with leveraged buffered notes in easily replicating the same outcomes.

The sellsider disagreed.

“You can try to replicate a leveraged buffered note with an ETF. Technically it’s been done already. But it’s not as precise,” he said.

Buffer ETFs are struck every year and restruck every month with a 12-month maturity, he said.

“They’re on a regular schedule and if you want a certain strike, it’s rare that you’ll get what you want. With a note, you can target any entry point and issue whenever you want at the desired strike. Not with a buffer ETF,” he said.

“Buffer ETFs are like a bus. It’s rare to be exactly where you want to be at the right time. By the time you buy it, the strike is already stale. You have to be at a bus stop at a certain time and if you miss the bus, you have to walk to the next stop. A note on the other hand is like Uber. You pick your strike. The issuer will tailor it for you.”

Year to date

Issuance volume for the year declined by 3.7% to $69.76 billion in 16,544 deals from $72.46 billion in 22,058 deals, according to the preliminary data.

“It’s an improvement from earlier in the year when we were down double-digits,” the sellsider said.

The gap was almost down to zero recently but is now slightly widening again.

The drop may be due to the boost in issuance volume in September of last year due to Barclays’ rescission offer, he said.

“I think it’s very likely to be the case.

September last year was the top month with $10.76 billion, a tally not matched by any month so far this year.

JPMorgan was the top agent last week with $204 million in 35 deals, or 24% of the total. It was followed by UBS ad BofA Securities.

The No. 1 issuer was JPMorgan Chase Financial Co. LLC with $205 million in 38 offerings.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.