Structured products agents sell $340 million amid second week of post-election rally, higher yields

By Emma Trincal

New York, Nov. 23 – Volume in structured notes issuance was modest in the short trading week prior to the Thanksgiving holiday.

Agents sold $340 million in 155 deals, according to preliminary data compiled by Prospect News. Sizes were noticeably small with the top offering hardly bigger than $20 million, the data showed.

Those figures may not be final. Some deals may not be included in the totals at press time depending on how soon firms file their offerings with the Securities and Exchange Commission website.

Stocks in the week ended Nov. 18 extended the post-elections rally, with the S&P 500 index hitting an all-time high of 2,187 on Thursday. Rising long-term rates, a trend that began last summer, remained one of the week’s dominant themes. A continuation of that trend, sellsiders said, may help with the pricing of principal-protection notes although it will take some time before rates become high enough to make those structures work.

Asked how he foresees the market for structured notes for the rest of the year, a sellsider said:

“Who cares about structured notes at this time? Who knows what’s going to happen to the market and to the World? It’s far too soon to predict anything.”

He was commenting on the upset election of Donald Trump as president of the United States, which has led to a sharp rally in stocks.

Bond yields and the U.S. dollar rallied as well.

The elections also saw the Republicans maintain control of Congress.

“It’s not just Donald Trump. It’s the fact that the Republicans control both Houses and the White House, There will be a fiscal stimulus on the way, there will be deregulation and that’s why the market is up,” a second sellsider said.

But the first sellsider said that the environment is very uncertain and that the excitement may be overdone.

“I’m never going to try to predict anything again. I was wrong. Everybody was wrong,” the sellsider said. “Brexit was not supposed to happen and we had Brexit. Everyone said there would be a huge correction. It didn’t happen. Markets jumped up instead. Then we had the U.S. elections. Donald Trump was not supposed to be elected. Every analyst had predicted at least a 10% drop. The market rallied.

“The only sensible thing to do is to refrain from pretending that we know the future.”

One change however could strengthen issuance.

“If we had some volatility, it would help volume in structured notes,” the sellsider said.

While bond yields rose, volatility was subdued. Sources noted that it was not helpful for short-volatility notes that pay a coupon to investors through the premium.

Most long-volatility strategies have been down last week as the VIX was trading at all-time lows levels below 13, said Paul Weisbruch, vice-president of options and ETFs sales and trading at Street One Financial, in a research note.

“It seems to me that last week was pretty normal,” said the second sellsider, noting there was “not a lot of activity compared to the broader market with stocks going on rally mode. But that’s because no one had a chance to really react to it. All the action happened the night before the elections and the few days after. You didn’t have time to price notes adjusting to this.”

The top deal was GS Finance Corp.’s $21.2 million of two-year leveraged buffered notes linked to the S&P 500 index. The payout at maturity was 150% of the index gain subject to a 19.87% cap. The downside featured a 10% geared buffer with a 1.11 multiple.

Next, came UBS AG, London Branch’s $12.33 million of five-year trigger autocallable contingent yield notes linked to Bank of America Corp.

The notes each month paid an 8% per year contingent coupon if the shares closed above a coupon barrier of 61.7%. After one year, the notes were autocallable each month if the stock closed above its initial price. The 61.7% was also the barrier at maturity.

The 10-year Treasury yielded 2.36% on Wednesday, one percentage point more than its low in July.

But such increase has not caused volume in interest-rates linked notes to increase, according to the data, which showed no such deal priced last week. Prospect News in its accounting of rate-linked products does not include step-up notes, step-down notes, fixed-to-floating rate notes and capped floaters.

Despite the low volatility environment, autocallable reverse convertibles continued to prevail. It was the top structure with $187 million in 114 deals, or 55% of the total. The proportion of single-stocks was greater than the yearly average with 25% of the total, versus only 11% for the year.

UBS was the top seller of those products with 65 deals totaling $60.56 million. JPMorgan was next with $55.66 million in 26 deals.

Volume for November is down from last month. Agents priced $987 million in 362 deals through Nov. 18 versus $1.16 billion during the same time in October, a nearly 15% decline.

As the end of the year nears, 2016 is likely to remain weaker than last year. Agents have priced $32.92 billion this year through Nov. 18, a 15.70% decline from last year’s $39.05 billion.

The top agent last week was JPMorgan with $99 million in 40 deals, or 29.10% of the total. It was followed by Goldman Sachs and UBS.

“If we had some volatility, it would help volume in structured notes.” – A sellsider

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