Structured products issuance $145 million for week, a low for the year; investors distrust rally

By Emma Trincal

New York, Aug. 10 – Agents priced a meager $145 million of structured products last week as depressed volatility and declining interest rates across the globe are making investors nervous about current market conditions despite a rally propelled by a strong U.S. job report on Friday. Investors remain cautious, sources said, adding that investors attribute the recent market highs to global central banks’ easing rather than fundamentals.

Last week’s volume was the lowest weekly notional seen this year, according to data compiled by Prospect News.

The calendar is partly responsible for the slowdown – August is typically slow as well as the start of new months.

Yet sources said that the market is also making investors increasingly nervous, pushing many of them on the sidelines.

Thin trading

“It’s almost impossible to fight the annual slowdown. Everybody is out in August. Most of the major players are vacationing,” said a market participant.

He pointed to late June’s so-called Brexit, a term that designates the U.K. vote to leave the European Union. The vote immediately rocked global markets. A rally followed, but this market participant said that a growing number of investors are increasingly skeptical about the uptrend, arguing that stocks are kept artificially high by the Federal Reserve’s easing policy.

“People who got pushed to the sidelines when they got out of the way because of the Brexit are not back yet. We’ve hit new highs but volume isn’t there. This rally is not supported by volume.”

Depressed rates

Low interest rates continue to prevail and many see this as a long-term trend, or at least, one to last longer than anticipated earlier this year, he said, as the Fed is not signaling its intention to raise rates in the near future.

Ultra-low interest rates are taking a toll on investors looking for income, sources said.

The perception that central banks are increasingly dovish worldwide was reinforced by last week’s decision by the Bank of England to cut rates by 25 basis points.

“People are buying risk assets but it’s artificial because it’s supported by central banks pushing down interest rates,” he said.

“More and more people get nervous about central banks’ complacency. You have a lot of reasons for staying on the sidelines. There are a lot of unnatural things happening at the moment.”

Income plays

Autocallable reverse convertibles, which sell volatility to generate income, represented the top structure last week with 41% of the volume, according to the data. This penetration rate was much higher than the annual average of 23%, confirming investors’ ongoing hunt for yield, an increasingly important trend in the U.S. structured products market, sources said.

Those products were for the most part structured around single stocks. The volume of single-stock underliers reached 30% last week, which was much higher than the 9% year-to-date trend.

A smaller group of autocallable reverse convertibles were multi-asset notes with a worst-of payout and tied to either equity indexes or equity funds, the data showed.

Yield hunting

“People go to stocks for yield. You see that everywhere. I keep on reading articles about how to make 5% with stock yields. The dividend play is all over the media,” said the market participant.

“Structured notes tied to stocks are sold for the same reason. No wonder these products are popular.

“People are just looking for any way to generate some sort of income because bonds aren’t generating any income.”

A sellsider agreed: low rates are increasingly pushing investors toward risky asset, increasing the odds of a major correction.

Year down

“It’s been slow across the board in the market,” this sellsider said.

“Markets are trading at new highs, but a lot of investors are staying on the sidelines. There’s a lot of talk about a correction or even a bear market. Brexit scared a lot of people. You have this belief that the central banks are propping up equity markets. Investors are shifting to gold or silver.”

Volume continued to drag this year versus last year. Agents so far priced $21.52 billion as of Aug. 5 versus $28.40 billion during the same period last year, a 24% decline, according to the data.

The market environment is not the only factor behind the big drop in notional amount, according to this sellsider.

“Twenty-four percent is a big decline. It speaks to the fact that our industry hasn’t been able to reach out to go beyond the top players. As long as it continues that way, notional will continue to trend sideways or even decline. That’s what we’re seeing this year.”

The “top players” he was referring to are Bank of America and JPMorgan, which so far this year priced 25% and 17% of the total volume, respectively.

Last week, the No. 1 agent was JPMorgan with 14 deals totaling $27 million, or 18.5% of the volume. It was followed by Barclays and HSBC.

Top offerings

Deals were below the $15 million mark last week, which is exceptionally small, according to the data.

HSBC USA Inc. priced the top one with $14.87 million of two-year leveraged notes linked to a basket of unequally weighted international indexes. The structure offered a 1.6 leverage factor on the upside with a 32.8% cap and a 15% geared buffer on the downside.

The second offering was GS Finance Corp.’s repeat deal tied to its “Momentum” proprietary index. The firm priced $11.21 million of 10-year notes linked to the GS Momentum Builder Multi-Asset 5S ER index.

Investors received par plus 3.75 times the index gain with no cap. The downside was fully protected.

BofA Merrill Lynch priced on the behalf of Royal Bank of Canada the next deal – a $10.17 million issue of leveraged notes linked to common stock of Amazon.com, Inc.

The payout at maturity was par plus triple any gain in the share price, up to a maximum return of 21.3%.

Investors were exposed to any decline in the share price.

“People who got pushed to the sidelines when they got out of the way because of the Brexit are not back yet.” – A market participant

“It’s been slow across the board in the market.” – A sellsider

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