Weekly tally for structured products at $500 million; leveraged notes issuance weakening

By Emma Trincal

New York, March 27 – Agents priced $513 million of structured products in 61 deals last week, according to preliminary data compiled by Prospect News.

For the month through March 22, issuance volume has fallen by 23% to $4.51 billion from $5.88 billion last month.

It is too soon to draw conclusions at this junction as the tally remains incomplete due to delays in filings with the Securities and Exchange Commission as well as the data collected without the final week of the month.

Leveraged structures were on the decline both last week and for the month. The trend, however, remained preliminary and recent. For the year, leveraged notes have seen their volume jump by more than 20%.

If confirmed, the current drop in growth products sales may be market-related.

With the averages reaching all-time-highs almost on a weekly basis, few investors are expecting further upside appreciation.

Three cuts, really?

Last week’s Federal Open Market Committee meeting drew enthusiasm from the market as it suggested three quarter-point cuts by the end of this year. The move pushed the three main equity benchmarks to new record highs the next day on March 21.

Varying expectations regarding the Fed’s policy have increased interest rates volatility.

Mark Dueholm, chief fixed-income trader at Landolt Securities, explained why short-term rates fell last week while there are reasons to believe they may continue to move higher this year.

“Just before the FOMC meeting, the market was anticipating two rate cuts. The stock market took comfort in the three-cut announcement,” he said.

“But behind this excitement, with the economy doing well and the stock market hitting new highs, you have to wonder if the Fed is really going to deliver three cuts. As long as the economic environment holds up, it might be risky to cut interest rates.

“Inflation is also stuck at 3%. Are they really going to ease when inflation is still 1% above their 2% target?”

Rates up for the year

While last week’s optimism about rate cuts compressed yields especially on the short end (the two-year Treasury yield fell by 11 basis points on the week), the trend for the year so far has been the opposite, said Dueholm.

“Even if the Fed projects rate cuts, the market earlier this year anticipated six cuts or even seven cuts, not three. These expectations contributed to pushing yields higher. I’m not looking at one-week moves. The trend for the year has been higher rates.”

To be sure, the two-year yield has increased by 31 bps year to date to 4.56%. The 10-year yield rose 32 bps to 4.19%.

Opportunity cost

The direction of interest rates has an impact on the pricing but also on the demand for structured notes, he said.

“I guess one reason why we might see less leverage, if that’s a fact, is because you can get such good interest rates on risk-free assets. Growth notes don’t give you income. The opportunity cost for buying notes that don’t produce income is much higher than it used to be,” he said.

“When interest rates were low, back in 2020, if you wanted to do a three-year note you were looking at giving up 0.15%. On a three-year, your opportunity cost was 0.45%. Today the three-year Treasury yields 4.35% and so you’re giving up 13%. There’s a big difference between a 0.5% opportunity cost and a 13% opportunity cost.”

While they may help pricing structured notes, higher interest rates on savings accounts, certificates of deposits and Treasuries are also having an adverse impact on callable notes, which are also conceived to provide income.

“The rise in interest rates this year has been challenging. Business is down,” Dueholm said.

“When coupons are barely higher than the risk-free rate, it doesn’t make a whole lot of sense to use an autocall.”

A market participant voiced similar concerns for both leverage and income products.

We’re not seeing anything new and exciting,” he said.

“Volatility has collapsed. The VIX is now below 13.”

For this market participant, higher rates would be preferable in order to keep call proceeds rolling into new issues.

“Some deals get called and you get a little bit frustrated. You lose a good note, and you have to replace it with a mediocre one,” he said.

Income notes prevail

Despite those concerns, income-generating notes remain the top structure for the year. Phoenix callable and snowballs put together accounted to $12.7 billion, a 46% jump in issuance volume from $8.68 billion a year ago.

This sustained demand for income notes has contributed to a strong issuance volume for all products of $23.66 billion year to date, a 15% increase from last year’s $20.57 billion.

“With the rally, income notes are not getting as much yield as I would like. But at the same time, notes are getting called,” the market participant said.

While leveraged notes issuance has been slow over the past few weeks, its growth remains robust on a year-to-date basis. Such products accounted for $4.34 billion this year, a 22% increase from last year’s $3.57 billion.

Other structures have helped issuance volume growth as well, in particular digital notes.

Digital twins

Two digital issues tied to a single index topped the list of last week’s deals. The two offerings had very similar terms and the same price.

JPMorgan Chase Financial Co. LLC priced $54.86 million of 18-month digital absolute return notes on the S&P 500 index. The upside digital payout was 15.6%. If the index fell by no more than a 26% geared buffer, the payout would be the absolute value of the return. Otherwise, investors would lose 1.3514% for every 1% that the index declined beyond 26%. J.P. Morgan Securities LLC was the agent. The fee was 1.51%.

For the same principal amount of $54.86 million and the same S&P 500 index exposure, Royal Bank of Canada priced a similar note but with a two-year tenor and a digital payout of 11%.

The buffer was 29.5% with a 1.4184x downside leverage factor. An index’s decline at or above the buffer level also provided absolute return.

iCapital Markets LLC was the dealer. The fee was 2%.

Both issues priced on March 18.

Daily coupon observation

Another sizable deal was Citigroup Global Markets Holdings Inc.’s $41.34 million of callable contingent yield notes with daily coupon observation due Dec. 24, 2026 linked to the worst performing of the Euro Stoxx 50 index, the Russell 2000 index and the S&P 500 index.

The quarterly contingent coupon was 10% a year with a 70% coupon barrier. The issuer may call the notes quarterly after six months. The point-to-point barrier at maturity was 60%.

UBS Financial Services Inc. was the selling agent.

Global bid, stocks

Regarding underliers, the Euro Stoxx 50 index appeared to make a comeback last week.

Either as a sole index or as part of a basket of indexes, the euro zone benchmark was used in 26% of the $383 million of notes linked to indexes and in six out of 31 deals for this category.

Dueholm said he has seen renewed interest in non-U.S. equity underliers.

“The Euro Stoxx has done well. The Nikkei has done incredibly well. It’s been going up like crazy actually. People tend to buy things when they feel optimistic even if it’s at all-time highs. They should actually do the opposite,” he said.

For stocks, Nvidia Corp. remained the preferred underlier. It was used in four out of 13 deals last week.

Morgan Stanley Finance LLC priced the largest Nvidia note in $14.34 million of one-year phoenix autocallable securities. UBS AG, London Branch sold another one for $10 million.

The top agent last week was UBS, which priced $145 million in 18 deals, a 28.2% share.

It was followed by JPMorgan and Morgan Stanley.

The No. 1 issuer was Morgan Stanley Financial Co. LLC with 12 offerings totaling $101 million, a 19.8% share.

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