Volume slow at $276 million amid market record highs, bonus season, Fed-induced confusion

By Emma Trincal

New York, Nov. 20 - As the year nears its end, last week's issuance pace was tepid. Agents priced only $276 million of structured products, making the period the fourth least active week of the year, according to data compiled by Prospect News.

As of Nov. 16, November sales have dropped nearly 19% compared to the same time last month.

The saving grace last week was the year's issuance, which has increased 4.5% to $32.80 billion from $31.40 billion for the same period of 2012, according to the data.

Recent market highs, the bonus season and the market grappling with the uncertainty around the future of the Fed's monetary policy were among the factors sources evoked to explain the slow activity.

A structurer said the bull market contributed to the slowdown not just for the week but for the month as well.

"Veterans Day definitely was a factor. But the reasons are not really clear," this structurer said.

"There's no real catalyst to bring money in. The market is pretty high."

The S&P 500 index closed at record highs three days in a row last week, closing at 1,798.15 on Friday, its all-time peak. The benchmark has declined since then.

"The market by nature is bullish. I think most people are satisfied with their long equity positions," the structurer said.

"Many have been waiting for a pullback that has not occurred. When we have a pullback, I expect that we'll have a lot more notional.

"A lot of those notes are contingent upon the equity staying above a certain level. With equity prices so high, the triggers are more likely to be hit."

'Silly season'

Another factor was the fiscal year ending last month, a market participant said.

"It's November. We're straddling the fiscal and the calendar year," he said.

"Some banks, including all the Canadian banks, had their fiscal year end in October. When the fiscal year has come to an end, it leads to some kind of distraction.

"Traditionally, November makes for a slow month. Look for November versus October last year. I bet you'll see a drop as well."

For the 1st through 16th of the month, volume dropped 6% to $834 million in November of last year from $888 million in October 2012.

Sources downplayed the impact of the 9th Annual Structured Investments Autumn-Expo 2013 Distribution conference held in New York on Nov. 12 and organized by the Structured Products Association.

"There was terrific participation from the sellside, but the desks were well-covered," the market participant said.

He mentioned "more important" reasons.

"The main one is that at this time of the year, people are very cautious. Everybody is on bonus mode. It's the silly season, the bonus insanity season," he said.

"People had a good year, and they want to hold back some trades until the following year to build a new P&L. After Thanksgiving, the business is pretty much in the books.

"And for right now, everybody is cautious and quiet."

Slow November

A sellsider pointed to the gap in volume this month compared to October. Agents have priced $842 million this month, compared with $1.37 billion last month as of the 16th, the data showed.

"The biggest issue is that October was a great month for everyone and November started out pretty weak," the sellsider said.

"Maybe clients are already Christmas shopping.

"All the clients across the board we're reaching out to are saying that it's one of the slowest months so far.

"We're at all-time highs in equity, and people are beginning to fear the market is too toppish.

"You start wondering, Will my two-year note with a barrier be safe?"

Finally, the sellsider said that market conditions are not improving. In fact, they may even get worst as the Federal Reserve suggested Tuesday that interest rates will be held near zero for a longer time than markets have anticipated, he noted.

"They said rates will remain low even if the Fed starts tapering," he said.

"A lot of people had the impression that rates would move higher sooner. The market so far expected a rate hike for 2014. But it's not going to be the case until at least 2015, so I think people are confused about what the message of the Fed really is."

Bad pricing conditions

"That leaves us with very low volatility levels, equity at all-time highs and low interest rates," he said.

"You don't get the best structures in this market environment.

"People see deals that are not paying the same kind of coupon they had six months ago as we've seen volatility come in a lot. You're getting lower caps, not that many buffers, and barriers that are not as generous as before.

"Clients are becoming ever more tactical. They still like the product, but they're more selective on when they pull the trigger. They hold off on executing until they feel more comfortable. I'm talking about one-off transactions. We may be pitching a deal that's on our monthly offering. A client may like it and say, Let's do a one-off deal but with better terms. But you may not get those better terms, so there's no deal."

Top offerings

The largest deal last week was an interest rate-linked product brought to market by Citigroup Inc. and sold by Morgan Stanley Smith Barney LLC.

Citigroup priced $38.46 million of leveraged callable CMS curve-linked notes due Nov. 15, 2028 linked to the 30-year Constant Maturity Swap rate and the five-year Constant Maturity Swap rate.

For the first year, the interest rate is 10%. After that, the interest rate is four times the spread of the 30-year CMS rate over the five-year CMS rate, subject to a cap of 10% per year. The notes are callable after two years. The payout at maturity will be par.

The second offering was a digital note linked to a single stock distributed by BofA Merrill Lynch.

Barclays Bank plc priced $36.54 million of 0% one-look notes due Nov. 28, 2014 linked to the common stock of Apple Inc.

If the final share price is greater than or equal to the initial share price, the payout at maturity will be par of $10 plus 22.32%. Otherwise, investors will have 1-to-1 exposure to the stock's decline.

Credit Suisse AG, London Branch priced the No. 3 deal, which was also linked to a single stock. It priced $25.36 million of 8.5% STEP Income Securities due Nov. 28, 2014 linked to the common stock of Masco Corp.

If the final price of Masco stock is greater than or equal to the step level, the payout at maturity will be par plus the step payment, which was set at 5.27%. The step level is 108.5% of the initial price. Investors receive par if the final share price is between a 95% threshold level and the step level. If the final share price is less than the threshold level, investors will lose 1% for every 1% that the price declines below the threshold level.

There were an unusually high proportion of single-stock deals last week (61% of the total) compared to equity indexes (20%).The average for the year tends to be closer to the reverse proportion, according to data compiled by Prospect News.

The top agent last week was Bank of America with three deals totaling $73 million. It was followed by Citigroup and UBS.

"Many have been waiting for a pullback that has not occurred." - A structurer

"Clients are becoming ever more tactical." - A sellsider

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