Week sees strong action with $1.51 billion sold; Goldman Sachs prices $152.46 million CMS deal

By Emma Trincal

New York, May 6 – The week ended Friday saw big agents other than Bank of America push up volume to $1.51 billion in 288 deals, according to data compiled by Prospect News.

Bank of America had priced its own products the week before. It printed $1.04 billion out of that week’s $1.37 billion, capturing a stunning 76% market share. In the latest week, Goldman Sachs, UBS and JPMorgan followed suit.

Good April

Both heavy weeks contributed to make April a solid month at $3.94 billion versus $3.51 billion in April 2014, a 12.35% increase, according to the data.

March, which recorded $4.17 billion of volume, was a better month, but it always is as the first quarter tends to be the best quarter of most years, according to the data.

“April for us picked up quite a bit both on the secondary market but also on the primary market where we did a couple of trigger deals. The vast majority of that was wealth management driven,” a distributor said.

Last week’s main theme was the pricing of large rate deals, driving up this asset class to 15.50% of the total volume issued. Its year-to-date average is only 2.3% in comparison.

Goldman’s $152.46 million

The largest deal, a rate structure, was Goldman Sachs Group, Inc.’s $152.46 million of floating-rate notes due May 5, 2025.The interest rate, payable monthly, was equal to the 10-year Constant Maturity Swap rate. The payout at maturity was par. Goldman Sachs & Co. was the underwriter.

“That’s a great price,” a rate structurer said.

But he was not entirely surprised.

“You’re just seeing more institutional players looking at structured rates as a way to express their views,” he added.

“This deal was sold to an advisory, maybe to their private wealth team,” an industry source said.

Wells Fargo & Co. priced another larger-than-usual rate deal with $39.87 million of fixed-to-floating-rate notes due April 30, 2025 also linked to the 10-year CMS rate. The interest rate was 3% for the first two years. After that, the interest rate would be 0.93 times the 10-year CMS rate. Interest was payable quarterly.

The payout at maturity was par.

Wells Fargo Securities, LLC was the agent.

CMS theme

“It’s fairly uncommon to see the top deals in rates. But we’ve had a little bit of a pickup in the market, and people may have been looking for income alternatives,” the distributor said.

“CMS floaters are traditionally products designed for institutional buyers. I think that’s what we have here.”

Four other interest-rate-linked note offerings in smaller sizes (from $3 million to $17.06 million) also priced last week sharing the same characteristics: they were fixed-to-floater structures tied to the 10-year CMS rate. They were not CMS spread products. Goldman Sachs priced the largest for $17.06 million, and Morgan Stanley, Bank of America Corp. and Citigroup, Inc. did the others.

Bond sell-off

“There’s a huge sell-off in the bond market. Yields are rising. Clients want to have exposure to higher rates, so it’s one way to do that,” the rate structurer said.

“It used to be that people would look at the spread on the yield curve.

“Instead what we’ve seen last week were simply deals that express a view on one point of the yield curve, the 10-year. People are not looking at the spread. They just focus on the actual rate.”

The 10-year Treasury yielded 2.24% on Wednesday as of the early afternoon. That was 12 basis points more than at the beginning of the month. Wednesday’s yield was 56 bps higher than 1.68% – the lowest yield so far this year, which was in early February.

A market analyst at a sellside firm explained how pressure on the dollar contributed to the sell-off.

“It’s all about positioning squeezing,” he said.

“People were long the dollar, and with the dollar weakening, they found their position crushed. They were forced to sell their Treasury positions. We’ve seen unwinding of bonds probably in the five- to 10-year duration.

“There was a long-duration concentration of positions. The sell-off of Treasuries had little to do with macro factors. At the contrary, the softer-than-expected GDP for the first quarter, if anything, should have pushed rates lower.”

Steepeners, or bets on a positive difference between a long and a short rate, were not seen last week.

“I’m not sure why,” the analyst said.

“But actually the curve is steepening. Again it has to do with this concentration on longer-dated positions. People have been selling on the long end, being squeezed out of their positions, and yields on this part of the curve have been pushed higher.”

Fixed rates

Agents priced six rate offerings last week totaling $233 million. Those products were all linked to the 10-year CMS rate, and all of them except the top Goldman deal offered a fixed rate for an initial period.

The Wells Fargo 10-year deal for instance featured a 3% interest rate for the first two years. Goldman Sachs’ $17.06 million 15-year notes had a 4% interest rate during the first five years.

“This is not unusual. It’s not just CMS spreads that have a teaser. Ten-year CMS deals can also have fixed rates. It’s similar to the Libor fixed-to-floater,” the structurer said.

“The whole idea is that rates are higher, so people want to lock in the higher rate.”

Less equity

Last week was not big for equities compared to the year-to-date average.

Equity underliers, including indexes, single stocks, baskets of stocks and exchange-traded funds, have constituted about 90% of the total volume this year on average.

Last week, equity accounted for only 70% of the market, according to the data.

This was partly due to the push in rates but also to a large commodity transaction, the third in size for the week.

Goldman Sachs priced $74.82 million of 0% notes due May 19, 2016 linked to the Bloomberg Commodity index.

The payout at maturity was par plus the index return.

Goldman Sachs & Co. was the agent.

On the equity side, JPMorgan Chase & Co. priced the No. 2 offering with $86.63 million of 0% leveraged buffered notes due May 3, 2018 linked to the ordinary shares of the 23 companies included in the MSCI Spain 25/50 index. The upside participation rate was 150% of the basket return up to a 48% cap. The downside was protected by a 10% geared buffer with a 1.11 multiple.

Goldman Sachs was the top agent last week with 22 deals totaling $328 million, or 21.70% of the total volume.

It was followed by UBS (20.90%) and JPMorgan (20.30%).

“You’re just seeing more institutional players looking at structured rates as a way to express their views.” – A rate structurer

“It’s all about positioning squeezing.” – A market analyst explaining how pressure on the dollar has contributed to the sell-off

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