Harris' CDs inversely tied to Barclays Treasury index: long duration of short bet seen as risk

By Emma Trincal

New York, Dec. 14 - Harris NA's upcoming certificates of deposit due Dec. 30, 2016 inversely linked to the Barclays 7-10 Year Treasury index offer an attractive bet for investors who anticipate a rise in interest rates, sources said. But the duration of the short bet may also be a concern.

Treasuries bears

"I believe in the underlying message," said Tony Romero, co-founder of Suncoast Capital Group.

"I would actually consider buying this investment for myself because I am very bearish on Treasuries.

"If the next Congress is unwilling to raise the debt ceiling next year, it will trigger a rise in interest rates. They're already rising anyway."

The payout at maturity will be par plus the greater of the index interest amount and the minimum interest rate, according to a term sheet.

The minimum interest rate will be 4.5% to 7.5%, or 0.74% to 1.21% per year, and will be set at pricing.

If the final index level is less than the initial level, the index interest amount will be the absolute value of the index return. Otherwise, the index interest amount will be zero.

"It's not often that I like one of those structured investments, but this one I like a lot," said Romero.

"I believe rates will go up significantly. At least they will go up short term. Then they may remain flat for a while, but they won't come back down.

"So even if six years is a long time, sometimes those trades take that long to unwind."

Too long

However, the six-year duration was a deal-breaker for a financial adviser.

"This duration is longer than what my clients would be willing to lock up their money," said Jeff Daniher, co-owner of Ritter Daniher Financial Advisory.

"It may make sense to do this for three years, but not six.

"I value liquidity over anything else. I want to be able to enter any exit point along the way.

"That term is just so long for that type of trend. You could be right and still be wrong. Rates could increase and then roll back."

CD versus ETF

"For the same bet, you can get much more liquidity with an ETF," Romero said.

When considering this investment over other vehicles such as exchange-traded funds, investors often take into account the insurance offered by the Federal Deposit Insurance Corp. on the CD.

"The FDIC insurance has little value for this type of trade," Romero said.

"I'd be much more willing to sacrifice the FDIC insurance in exchange for liquidity."

Daniher added that the FDIC insurance may not be enough to lure conservative investors.

"The FDIC insurance should appeal to very risk-adverse investors," said Daniher.

"But by definition, those investors wouldn't be looking into a synthetic note because you still have credit risk and your returns are tied to the market," he said.

However, both sources agreed that the terms of the CDs were fair.

"It's attractively priced," said Daniher. "If you're wrong, you still get something."

"The minimum rate is small, but it's certainly something. There's a floor. You can't get less than a certain amount of interest at maturity. And that's a good thing," said Romero.

The CDs (Cusip: 41456TLB3) will price Dec. 28 and settle Dec. 31.

Incapital LLC is the distributor.

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