Barclays’ $15 million floating-rate notes tied to CPI reflect rising concerns about inflation

By Emma Trincal

New York, May 16 – Barclays Bank plc’s $15 million of floating-rate notes due May 22, 2023 linked to the Consumer Price Index was one of the top five deals to price last week, showing that the need for inflation protection remains strong despite recent weaker reads on the index.

The interest rate will be equal to the annual percentage change in the index plus 100 basis points, according to a 424B2 filing with the Securities and Exchange Commission.

Interest will be payable monthly and cannot be less than zero.

The payout at maturity will be par.

Decent size

“Unusual to see that type of product for $15 million, especially for CPI-linked notes. It’s a pretty decent size. Those deals were more frequent in the past although it has never been a mainstream product by any means,” an industry source said.

“But it’s not entirely surprising. The business press talks about inflation all the time. It’s possible that as inflation becomes more of a concern, we’ll see more interest for these kinds of notes.”

Not so common

Barclays’ offering was the 12th CPI product to price this year for a $72 million total notional, according to data compiled by Prospect News.

It was the top one for the year along with another Barclays deal of the same size, which priced in March.

Other issuers included Morgan Stanley and Bank of America Corp. and Royal Bank of Canada and HSBC USA Inc.

“You’re getting inflation protection plus 100 basis points. The structure is simple enough to be appealing to a broader customer-base,” this industry source said.

If inflation begins to grow, demand for those products will pick up, he predicted.

“Getting a positive return above inflation is attractive. Inflation is the enemy of fixed-income investors.”

Higher rates

Current market conditions may also be at play to facilitate the pricing of full principal-protection.

“I’m hoping for the industry that we will soon get into a sweet spot where rates are sufficiently high to give you more money to buy the options. That’s a basic condition to create principal-protected notes. If at the same time volatility slightly picks up, you get the best conditions for much better terms on a wide range of products.”

Inflation agnostic

A market participant said that the notes were designed to fit a particular view, which was not his own.

“It’s someone’s view and that’s OK. Structured products are made that way: someone has a view, inflation will go up and a product is created around that,” he said.

“Do I share that view? No, I don’t. I don’t expect inflation at all.

“Just like I don’t expect an inverted yield curve... But a lot of people are talking about it on TV all the time.”

Inflation concerns in his opinion are simply the result of specific economic factors, such as the drought in the Midwest affecting grains and also gasoline prices.

But signals of inflation are mixed and far from convincing, he noted.

Last week showed lower-than-expected inflation data alleviating some of the fears that the Federal Reserve would be aggressively tightening rates. By easing those concerns, the data was one of the drivers behind the market rally.

Earlier this month, San Francisco Fed president John Williams said, “I don’t see any rapid increase in inflation coming,” the market participant noted.

Stay short

Regardless of inflation projections, this market participant said he would not invest in the notes.

“I don’t think it’s a great trade,” he said.

“You could buy the one-year T-Bill and get a yield of 2.28%.

“Why would I want 1% + inflation on a five-year note when I can get 2.30% on a one-year T Bill? Here I’m taking no risk.”

His reasoning was based on the shape of the yield curve.

“Right now the curve is very flat.

“It tells us we are paid to stay short, not long,” he said.

He explained the benefit of short duration with the following example.

At 3.2%, the 30-year Treasury yields less than 100 bps more than the one-year T Bill.

“Pick the mid-point of that spread between the one and the 30. It’s 50 bps over the one-year T Bill, which is 2.78%.

“That’s exactly the yield on a three-year Treasury. You only have to go to the three year to get half way through the spread between the one and the 30 years.

“Why would I want to go any further? I don’t need to go out five years,” he said.

Barclays is the agent.

The notes priced May 9 but will settle May 22.

The Cusip is 06746XBW2.

© 2015 Prospect News.
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