Structured products tally for week $533 million; big rate trade, buffered digitals eyed

By Emma Trincal

New York, Sept. 6 – Structured products agents priced $533 million in 122 deals in the week ahead of the Labor Day holiday, according to preliminary data compiled by Prospect News.

Sales for August totaled $6.98 billion in 1,221 offerings. The year-to-date notional through Sept. 1 hit $61.74 billion in 14,219 deals, a 1.62% decrease from last year’s $62.76 billion in 19,497 deals.

Those figures will be revised upward as not all offerings were filed with the Securities and Exchange Commission website by press time.

Top deals

Last week’s top deal was a short-term rate product.

JPMorgan Chase Financial Co. LLC priced $50 million of one-year fixed-to-floating rate notes with a 7.35% per year interest rate for the first three months. The variable rate after that is the one-year U.S. dollar SOFR ICE swap rate plus 20 basis points.

JPMorgan also brought to market two in-the-money digital notes on the S&P 500 index.

The first one, for $29.26 million, was a one-year issue with a 20% geared buffer on the downside. The 7.5% digital payout was triggered at or above the 80% strike at maturity.

The second deal used the same template. The difference was a geared buffer of 15% and an 8.35% digital payout.

Most top deals were short-dated notes, reflecting favorable pricing conditions on this part of the curve.

Short-term pricing

“Short-term rates have gone up a lot, much more than longer-term rates. There’s just more money to play with,” said Samuel Rosenberg, managing partner at hedge fund Lutetia Capital.

Favorable pricing also results from higher returns on a per-annum basis, said a sellsider.

“The option premium that you sell translates into the coupon to the customer,” he said.

“The shorter the term, the more premium per annum you get, which is what customers look at. They only care about their return per annum.”

Rates direction

But the market may be turning. Some predict that rates may be falling soon given recent signs of an economic slowdown and contained inflation as evidenced by last week’s August jobs report, revealing a rise in August of the U.S. unemployment rate to 3.8% from 3.5%.

After hitting a 16-year record high of 4.357% two weeks ago, the 10-year yield closed at 4.184% last week.

The two-year T-bill rate fell to 4.89% last week after touching a high of 5.117% on Aug. 28.

Sources were unsure about the longevity of the trend and whether bond bulls will have the last word.

Fed wildcard

“The market sentiment is changing with every piece of data coming out,” said Rosenberg.

“But everyone agrees that we’re near the end of the Fed tightening cycle.

“Still the objective for the Fed is to bring inflation down it its 2% target. So how far do they need to raise the rates to reach that goal? That’s the risk. Everybody agrees that we’re not at the top but near the top. We’re just near the end of the tightening cycle.”

The stock market would be poised to benefit from the Fed wrapping up its interest rate hiking cycle.

“If rates go down, they won’t go down precipitously. But it would create a huge sigh of relief for the market,” he said.

Higher interest rates have helped pricing in general, especially in an environment of compressed volatility. This raises the question of the impact of lower rates on structures if bond bulls were to prevail.

“I doubt rates will go down that much, and even if they do, they’ll still be much higher than what we’ve been used to,” said the sellsider.

And in fact, last week’s falling rates trend could be just a fluke. The two-year Treasury has already climbed back over 5%.

Principal-protection

One advantage of higher rates has been to facilitate the pricing of principal-protected notes, giving investors more attractive terms.

Full protection, however, remains expensive and has limitations, even in a higher-rate environment, said the sellsider.

“Principal-protection structures usually do not include the leverage component,” he said.

Most recent principal-protected notes on the S&P 500 index indeed tend to have maturities in excess of three years (usually five years). The 100% participation on the upside is capped unless the structure features a one-time autocall early on.

Single indexes

Index-linked notes made for more than two-thirds of last week’s notional with $360 million in 81 deals.

For a change, the issuance volume of notes tied to single indexes surpassed the worst-of tally by almost two-to-one. Single index issuance totaled $226 million in 40 deals while indexes with worst-of payouts were at $124 million in 39 offerings. The remaining $10 million came from weighted baskets of indexes.

Single indexes were used in each of the top nine trades, employing alternatively the S&P 500 index or the S&P 500 Equal Weight index.

One explanation for the push toward single indexes last week was the use of digital notes on the top of the list as those structures rarely use worst-of payouts.

Last week’s emphasis on single underlying does not necessarily represent a trend though since issuers continue to need the extra premium from worst-of.

“Correlations remain high, but volatility is so muted, you still need to do these worst-of. What else can you do if you want to generate decent coupons?” said Rosenberg.

Vol. control

Issuance of notes linked to volatility control indexes was relatively high last week. Six offerings using those algorithm indexes hit the market totaling $40.5 million, or nearly 8% of the total.

Their market share for the year to date is 0.7%.

The top offering in this asset class was GS Finance Corp.’s $19.32 million of seven-year autocallable index-linked notes tied to the GS Momentum Builder Focus ER index.

GS Finance also used this underlying to sell $2.54 million of three-year notes paying at maturity 4.58 times the return of the index with principal protection on the downside.

Rosenberg explained the rationale behind those trades, which are also very popular among CD buyers.

“You get very high participation rates. Those indices lower the implied volatility and they’ve been around for a very long time. They probably had a decent performance. People have adopted them,” he said.

If combining leverage and principal-protection has been a problem, using vol. control indexes has often been one of the rare solutions.

Other defined volatility strategies employed are the J.P. Morgan Efficiente Plus DS 5 index, which uses a dynamic allocation approach while capping historical volatility at 5%, and the MerQube US Large-Cap Vol Advantage index, which provides exposure to E-Mini Nasdaq 100 Futures contracts with a volatility target of 35% and a maximum exposure of 5. This decrement index applies a 6% deduction to the index return.

New underlier

Also notable was the use by GS Finance of a new underlier called the S&P 500 Futures Excess Return index.

This index, which launched 13 years ago, measures the performance of the nearest maturing quarterly E-mini-S&P 500 futures contract trading on the Chicago Mercantile Exchange.

While the index is not new, its use as an underlying is.

GS Finance sold four small deals on this equity futures underlying last month totaling $12.62 million. It was the first time this index was used in a registered structured note, according to Prospect News.

One of those deals, which sold for $6.83 million offered 2.5 times uncapped leverage on the upside and a 20% geared buffer on the downside over a two-year term.

The top agent last week was JPMorgan with $177 million in 20 deals, or 33.2% of the total.

It was followed by Morgan Stanley and Goldman Sachs.

The two top issuers were JPMorgan Chase Financial and Barclays Bank plc, both bringing to market an equal tally of $127 million in 18 and 27 deals, respectively.

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