Inflation-linked commodities notes gain in popularity, market insider says

By Sheri Kasprzak

New York, June 11 - With the costs of commodities soaring, the demand for notes linked to commodities, including oil and gold, has skyrocketed over the past couple of months, a market insider told Prospect News Wednesday.

"There has been an increase, I'd say, over the past month or so," said one market source when asked about the surge in commodities-linked offerings.

"Gold seems to be a big one right now. I mean, oil's out there, but we always see oil deals, so that doesn't seem like such a big deal to me. Gold prices have really shot up in the past few months. Looks like prices might be backing off a bit."

In fact, Merrill Lynch & Co. recently came to the market with a $5.91 million offering of 90% principal-protected notes linked to gold.

The five-year notes pay par plus a supplemental redemption amount equal to 85% of the percentage increase, assuming the value of the gold spot price is greater than the starting value. If the value is less than or equal to the starting value, investors receive a payment per unit based on the percentage decrease, but no less than $9 each.

Merrill's natural gas notes

Elsewhere at Merrill, the bank priced $55.4 million in leveraged natural gas notes.

The 28-month notes pay par plus 300% of the percentage increase, up to $16.036 per unit, or 60.36% over the $10 principal amount per unit, assuming the ending value is greater than the starting value.

The investors receive par at maturity if the ending value is equal to the starting value but greater than or equal to 85% of the starting value.

Investors receive par minus 100% of the decline beyond 15%, if the ending value is less than 85% of the starting value.

HSBC launches S&P Elements

In other news, HSBC USA Inc. said Wednesday it launched Elements exchange-traded notes linked to the S&P Commodity Trends Indicator - Total Return.

The structure is designed to apply a long and short approach to the commodities markets, said a statement released by the bank.

The ETNs began trading Wednesday on the New York Stock Exchange under the symbol "LSC."

The indicator is a composite of 16 physical commodity futures, grouped into six sectors. The S&P Commodity Trends Indicator positions are either long or short, based on its price behavior relative to its exponential moving average.

"We believe that the growth in the commodities sector is one of the key investment themes of our time," said Steven Phan, global head of global structured fund products at HSBC.

"This product improves upon the idea of passive index investing by applying a long/short strategy to the commodities markets."

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