More issuers are showing CPI-linked notes, but sources question the timing

By Emma Trincal

New York, Aug. 15 – Barclays Bank plc, Citigroup Global Markets Holdings Inc. and Morgan Stanley are readying notes linked to the Consumer Price Index to price later this month, according to three separate filings with the Securities and Exchange Commission.

The move caught some market sources’ attention as those products have become out of favor over the past few years.

But the trend has gained visibility this year, which saw the pricing of 12 CPI-linked note offerings for a total of $71 million, according to data compiled by Prospect News. This notional compared well with last year’s deal from Wells Fargo & Co. for $3 million, the only such deal for the entire year.

Three upcoming deals

Barclays Bank plans to price floating-rate notes due Aug. 24, 2021 linked to the CPI, according to a 424B2 filing.

The interest rate will be equal to the annual percentage change in the index plus 80 basis points.

Morgan Stanley is showing a similar deal over a longer maturity.

This issuer plans to price floating-rate notes due Aug. 24, 2023. The payout will be 100 bps over the year-over-year change in the CPI index.

Finally, Citigroup Global Markets Holdings plans to price floating-rate notes due Aug. 31, 2028 linked to the index. The spread over the CPI’s year-over-year change will be 135 bps.

For all three notes, interest payments are monthly and cannot be less than zero.

The payout at maturity will be par.

Good cholesterol

The latest CPI index data released on Friday showed a 0.2% increase for July and a year-over-year increase of 2.9%.

A market participant said he was not impressed by these figures. The lack of excitement among investors for CPI-linked notes is in his view simply the result of subdued inflation, which he does not expect to accelerate significantly.

“The market is constantly chatting about inflation. But there is no inflation at this point,” he said.

“There is a good inflation and a bad inflation like good cholesterol and bad cholesterol.

“Right now, it’s not inflation that we have. It’s growth.”

He pointed to the 4.1% annualized rate of Gross Domestic Product released at the end of last month.

“We have a strong economy that’s growing. We have more sales, more jobs. This is all very positive,” he said.

“Anytime you implement a new fiscal or monetary policy it takes six to nine months to get the full impact on the economy. The Fed is on this rant to stop inflation without looking at anything. They’re so bent on inflation that they are going to end up putting the brakes on the economy.”

Disruptive forces

Other fundamental factors are keeping a lid on inflation, he noted, such as innovative disruptions and competition among big technology firms.

“Price increases, wage growth all that is pretty muted. And that’s easy to see why. We have growth not inflation,” he said.

“Inflation is when you know that if you don’t buy something today it will be more expensive tomorrow. Right now, if you don’t buy it today, it will be cheaper tomorrow.”

Safer bet

Based on this view, this market participant said investors would be safer with U.S. Treasuries than with the floating-rates notes.

“If you have to go into a specialized bond, like an inflation bond, you should get a lot more spread than what they’re giving you.

“Just now I can get 2.9% fixed rate on a five-year Treasury. Why should I take a chance with a floater when the Fed is in a mission to squash any growth at all?” he said.

Inflation could drop

An industry source who focuses on income products offered a similar view.

“I kind of think the CPI is not a very compelling underlying right now,” this source said.

“You can get a five-year CD at 3.35%. That’s the current CPI growth plus 45 bps. The [Morgan Stanley deal] is giving you a spread of 80 bps. OK, that’s great...but only if the [CPI] index stays at that level. I don’t think it will. It seems kind of high right now.”

For this source, the Federal Reserve will remain in control of inflation.

“I’m not sure inflation is a serious risk right now,” he said.

“Inflation has picked up for sure. But it remains to be seen whether it stays at these levels.

The Fed will continue to raise rates steadily since inflation is above target.

“We’ll see more rate hikes. Rates will go up, but not necessarily inflation,” he said.

The Barclays and Morgan Stanley deals will settle on Aug. 24.

Citigroup’s notes will settle on Aug. 31.

The Barclays deal (Cusip: 06746XMB6) has Barclays for the agent.

Morgan Stanley & Co. LLC is the agent for the five-year notes deal.

The Cusip number is 61760QLQ5.

Citigroup Global Markets Inc. is the underwriter for the Citi offering.

The Cusip number is 17324CZR0.

© 2015 Prospect News.
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