February’s $1.62 billion tally strong so far as stock market goes into retreat mode

By Emma Trincal

New York, Feb. 15 – Structured products issuance volume was twice as high so far in February versus last month just at a time when the January rally seemed to be losing momentum.

Sales of structured notes for the month through the end of last week (Feb. 10) rose 104% to $1.62 billion in 280 deals from $793 million in 181 deals during the same time last month, according to preliminary data compiled by Prospect News.

Strong volume so far

“For us, February has definitely been up over January,” said Brady Beals, director, sales and product origination at Luma Financial Technologies.

“And we’re seeing the bulk of this pickup from growth notes.”

After January’s strong start, the stock market lost ground last week. The Nasdaq dropped 2.4% and the S&P 500 index fell by 1.1%. The Cboe VIX volatility index reached an inflexion point in the beginning of the month. On Feb. 2, the VIX hit a one-year low at 17 but rose above 22 on Feb. 10.

To be fair, the VIX remains relatively low compared to a year ago when it hit 38 as Russia invaded Ukraine.

“Pricing didn’t look great in January. The muted volatility could have been a factor in the slower pace of issuance,” Beals said.

Record inversion

One headline contributing to last week’s sell-off was the inverted yield curve reaching a new record. The spread between the two-year Treasury yield and the 10-year rose 85 basis points, its widest level since 1981.

The jump in short-term interest rates signaled that the market is less hopeful about a soon-to-come rate cut, probably after the strong job report released on Feb. 3, according to analysts.

“We’re not seeing any expectation that the Fed is going to put a foot on the brake,” said Beals.

“CPI numbers were not horrible, but inflation is not dropping quickly enough.”

Tuesday’s Labor Department numbers showing a 6.4% increase in January’s CPI year over year were higher than expected by the market.

This new mindset contrasted with last month’s Fed Funds futures pricing rate cuts, which fueled the rally.

The Treasury yield curve inversion also reinforced the idea that the Fed may not be cutting rates any time soon.

“The two-year yield rose a lot because this is the part of the curve where you see a lot of uncertainty given the Fed’s tightening of short-term rates,” said Beals.

“There’s less confidence that rates are going to go down on that part of the curve.”

Perhaps those moves in the Treasury market were one of the catalysts behind a fair amount of rate products, which hit the market last week.

Two-year floaters

Issuers brought to market at least three offerings of two-year floating-rate notes linked to the performance of the two-year U.S. dollar SOFR ICE swap rate.

Toronto-Dominion Bank’s $16.5 million was the largest one, paying each quarter the swap rate plus 115 basis points with a floor of 0.1%.

Canadian Imperial Bank of Commerce priced a second one for $5 million, and JPMorgan Chase Financial Co. LLC issued another for $4.3 million.

These deals followed JPMorgan Chase Financial’s $50 million of 13-month fixed-to-floating rate notes that are also linked to the two-year U.S. dollar SOFR ICE swap rate, which priced at the end of last month.

“I’ve seen a pickup in rate stuff,” a bond trader said.

“Floating-rate notes are very attractive in a rising rate environment.”

He explained why the tenors and underlying swap rates were two-year.

“Two years makes sense. The Fed doesn’t cut rates after they raise rates. In between they always pause.

“They have to because they don’t know right aways what the impact of their actions is. It usually takes six to nine months for rate hikes to filter into the economy.

“After two years, rates will go down. The Fed will go the other way.

“So floating-rate notes with one-and-a-half or two-year tenors is perfect,” he said.

Big discounts

CMS steepeners, which trade on the secondary market, were also attractive products, according to this trader.

Issuers have not offered new issues of steepeners for some time as the inverted yield curve depressed valuations and in some cases discouraged advisers.

But this trader adopted a contrarian view.

“Steepeners offer great bargains. They’re now trading at a 30 points discount,” he said.

“You should do great once the curve begins to steepen again.

“Besides, bonds mature. If you hold them, you’re not going to lose money. Who cares if prices are depressed in the meantime?”

Leverage push

One unexpected aspect of February’s softer stock market was the reemergence of leveraged notes, observed Beals.

“We’re seeing more growth notes than we had in the past. Advisers are showing more appetite for leveraged returns.

“Maybe it’s because we’re having some consolidation this month. When this happens, people tend to think the market will move higher. They don’t want to miss out on the upside. Some turn really bullish,” he said.

Leveraged notes issuance this month through Feb. 10 reached $387 million versus $132 million during the same time last month, the preliminary data showed.

Autocalls up

Autocalls also did well. They may have benefited this month from a slight increase in volatility.

Autocalls comprising Phoenix and snowballs amounted to $635 million this month versus $395 million in January.

But even January numbers are not all finite and Prospect News data suggest a possible uptick for January as more volume is expected to mature in January than in February.

The market is also a factor.

“It’s hard to tell how much the January rally will impact autocallable issuance,” said Beals.

“Obviously if deals get called, it helps.

“It’s a little bit of a case-per-case basis. I know that for us, we have about 60% in income and 40% in growth. Six months ago, it was more like 80%-20%.”

Big Canadian deals

Last week’s top three deals were all issued by Canadian banks. If the structures resembled those commonly used by BofA Securities, the overall market was dominated by Goldman Sachs and UBS.

“Canadian issuers have gained traction,” said Beals.

“I think it goes back to 2020 when you had a lot of issuance around Covid.

“In the second half of 2020, the appetite for American and European banks was not there. It’s hard to say why.

“Perhaps pricing was not as attractive. Perhaps banks had reached their issuance bogey and their Treasury didn’t want to take on more exposure. This is just a guess.

“TD and BMO jumped in first. Then you had Scotia, CIBC and RBC. All of those issuers came out outside of Merrill.

“Barclays being gone for a good part of last year helped as well.”

Top deals

The top deal last week was Bank of Nova Scotia’s $67.75 million of 13-month leveraged notes tied to the S&P 500 index. The notes pay 3x the gain capped at 17.64%. There is no downside protection.

Goldman Sachs & Co. LLC is the dealer.

Coming next, TD Bank priced another leveraged deal in $47.89 million of 18-month notes linked to an unequally weighted basket of five international equity indexes.

The payout at maturity is 2.09x the basket gain with no cap. Downside exposure was one-to-one.

Goldman Sachs & Co. LLC is the agent.

Finally, UBS sold on the behalf of CIBC $39.76 million of trigger callable contingent yield notes with daily coupon observation due Aug. 11, 2026. Investors are exposed to the worst performing of the Euro Stoxx 50 index, the Russell 2000 index and the S&P 500 index.

The quarterly contingent coupon is 13.16% based on an American barrier of 70%. The notes are callable on any quarterly observation date. The knock-in level (point-to-point) is 55%.

Last week’s top agent was UBS with $189 million in 53 deals, or 30.6% of the total.

It was followed by Goldman Sachs and JPMorgan.

Barclays Bank plc was the No. 1 issuer with 19 deals totaling $91 million, a 14.7% share.

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