Low volume drags on; stock bid reigns as investors anticipate pullback in September

By Emma Trincal

New York, Aug. 21 - Volume continued to be slow last week as the market braced for the Fed's eventual pull back on its stimulus program next month and a potential correction in a market that has reached all-time-highs, sources said.

Agents priced 81 deals totaling $241 million last week, a 10% decrease from the $268 million sold in 95 offerings the week before, according to data compiled by Prospect News.

For the month up until Aug. 17, sales grew 2.88% to $673 million from $654 million during the same period last month.

"There is definitely a slowdown in issuance," said Andrew Valentine Pool, main trader at Regatta Research & Money Management.

"We've seen it last month when we put an order on a deal and got an email from the issuer telling us that they weren't going to write the deal. That ticked me off about the volume because even if it was a small size - something around $100,000 - it only happened three or four times in the past four years. It happens all the time when we custom-do the deal, but it's rare with off-the-shelf products. In fact, we learned that we were the only adviser on this deal. So yes, I would say that things are pretty slow right now."

The year-to-date data remains inconclusive, especially prior to the end of the month when most deals are brought to market. The data shows a flat trend with volume up only 0.36% to $22.79 billion from $22.71 billion.

Stock mania

As seen before, single-stock underliers continued to gain market share and during some periods, took the lead over equity indexes.

For the year, single stocks are up 15% while equity indexes have declined by 2.25% even though indexes remained the main asset class with 54.6% of the year's notional versus 23% for stocks.

However, last week showed the opposite trend with stocks at 59% of the total versus 16% for equity indexes. The same pattern is true for the month to date with stocks and equity indexes accounting for 40% and 30% of the total, respectively.

"There is some feeling that maybe equity indexes are peaking. If that's the case, you try to get more selective because you have a more direct view. In some way, the broad-based view doesn't look as appealing as before," a sellsider said.

Last week leveraged notes, which are almost always tied to indexes, made for only 14% of the total. The yearly average is about 40%, according to the data.

Correction fears

"More people are embracing the consensus that we're going to have a pullback. They want to take control. I don't think the bid on stocks has much to do with volatility. I think it's more like investors want to take control," this sellsider added.

The slower volume and the stock-picking trend may have the same cause, said Pool.

"People anticipate a pullback," he said.

"This market has run up a lot. If you're going to stay in this market, you want to pick good quality stocks over indices. You pick the winners.

"If there is a pullback, you want to be able to pick the company that would be better off than the overall index.

"Also if the market pulls back, you want to have more cash to play with. You stay on the sidelines. That's what we've done. We bought light this month. I think we're not the only ones. This may explain why things are a little slow."

Pool said that he has done some research on mutual funds to identify the best-performing stocks.

"When the market bottoms, the strongest companies will be the place to be," he said.

"We're getting away from indices and funds and are focusing more on baskets of stocks and stock picking."

Notes linked to single stocks are also appealing because they can offer better terms, he noted.

"Those offer higher coupons, better protection. Obviously, if you take one stock or even 10 stocks, there's a great chance to get more volatility versus the Russell 2000," he said.

Top three

The top three deals last week were all stock based, according to the data. The first and the third one were "step income" structures. Those deals pay a fixed interest rate plus a contingent additional coupon paid when the underlying finishes above the coupon level. Those deals may or may not offer a protection feature.

Bank of America Corp.'s $35.01 million of 8% STEP Income Securities due Aug. 29, 2014 linked to the common stock of Freeport-McMoRan Copper & Gold Inc. was the No. 1 offering in size. The 8% annualized coupon rate is paid quarterly.

If the stock price finishes up by more than 8%, investors will get an additional payment of 4.52%. If the stock finishes negative but declines by less than the 5% buffer amount, they will get par. Beyond a 5% decline, investors will lose 1% for every 1% decline below the buffer.

BofA Merrill Lynch was the agent.

"We haven't seen this one," the sellsider said.

"But from our side, we're seeing that people are still actively trying to increase income. There aren't that many ways to achieve substantial yield. Those step-ups are definitely a way to do it."

Pool said that the deal was attractive.

"The gold miners right now are good on a technical basis. It priced at a reasonable level. It doesn't look overpriced or underpriced," he said.

The stock closed at $31.65 when the notes priced on Aug. 15.

"It's in a good range. We wouldn't turn it down if we were into Freeport-McMoRan."

Wells Fargo & Co. priced the second largest deal, $31.01 million of 8% equity-linked securities due Aug. 6, 2014 tied to Halliburton Co.

The third offering was sold by Bank of America but issued by HSBC USA Inc. It was $24.95 million of STEP Income Securities offering a 9.5% coupon on a one-year tenor. The notes are linked to the performance of Whirlpool Corp. shares. The structure offers an additional coupon of 5.33% if the stock finishes at or above the 109.5% step level, but unlike the other product, there is no downside protection.

"Step income products are popular because there's hardly anywhere else to go for income except autocallables," Pool said.

"Preferreds have seen their yield go down. MLPs are coming down as well.

"If you get 8% and hopefully some additional gains, it's pretty attractive, and at least it gives you some diversification."

The acronym "MLP" stands for master limited partnership.

Curve plays

Rates deals grew by nearly 6% last week, but their notional remains small at 5.75% of the total.

For the month this asset class showed a 40% decline, but the year-to-date trend is very strong with the size of this asset class up more than three-fold to $882 million from $289 million last year.

The sellsider said that he expects the interest in rates to remain strong.

"Over the last two months, there's been a dramatic shift in yield. If you look at the movement in the 10-year Treasury, yields have spiked, and bond prices have obviously dropped," he said.

Last week, the 10-year Treasury yield rose to 2.84%, its highest level in two years.

Morgan Stanley priced the No. 4 deal last week, which had rates included in the underlying in combination with equity in a range accrual structure. It was $20 million of fixed-to-floating leveraged CMS curve and Russell 2000 index-linked notes due Aug. 19, 2028.

The coupon is 10% for the first year. After that, it is four times the spread of the 30-year Constant Maturity Swap rate over the two-year CMS rate, subject to a minimum of zero and a maximum annualized rate of 10%, multiplied by the proportion of days on which the index closes at or above the initial level. The payout at maturity will be par.

"We like those types of deals because they are income enhancers," the sellsider said.

"It's not a growth scenario. You're only hoping for growth or stagnation in your index in order to continue to enhance yield.

"In fact, we're not seeing a huge appetite for growth structures right now."

The top agent last week was Bank of America with four deals totaling $80 million, or 33.4% of the total. It was followed by Morgan Stanley and UBS.

"[We] got an email from the issuer telling us that they weren't going to write the deal." - Andrew Valentine Pool, main trader at Regatta Research & Money Management

"Those step-ups are definitely a way to do it [increase income]." - A sellsider

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