February begins with $304 million of structured product sales; investors unfazed by correction

By Emma Trincal

New York, Feb. 14 – As the stock market continued its tumble last week, exacerbated on Thursday by the 10-year Treasury yield hitting 2.90% and the market hitting for the first-time correction territory, investors’ appetite for structured notes did not appear to recede.

Agents sold $304 million in 144 deals, a reasonable notional for the first week of the month, according to preliminary data compiled by Prospect News, subject to upward revisions.

Despite a last-minute budget deal voted by Congress on Friday morning, which ended the government shutdown and caused the market to rally, the Dow Jones industrial average finished this second week of a sell-off down 5.2%.

While volatility is back investors appear to be looking at the long-term picture and remain bullish attributing the correction to a well overdue readjustment after the market heating up in January by nearly 10%.

Resiliency

“So far sentiment remains positive, especially with the recent rebound, at least that’s what we’re hearing from our clients,” a sellsider said.

“I’m sure some are still waiting on the sidelines, but there’s still a lot of activity.”

The rebound in the market since Friday’s rally should help investors regain confidence as signs of buying on the dip have reappeared.

Investors in structured notes and equity investors alike appear to trust the rebound and may now believe that the worst panic-selling is over, this structurer said.

“Despite the huge volatility we just had, we don’t see signs indicating that investors have turned bearish,” he said.

Issuance volume is up for the year through Feb. 9 to $6.61 billion from $5.10 billion during the same period last year, a 30% increase.

On a 12-month trailing period, volume is up 34% to $51.7 billion in 13,861 deals.

Not like 2016

The last time global markets dipped into correction was during the first month-and-a half of 2016. Issuance volume then was down 7.6% from the comparable period of the previous year when the market was stable.

Many sellsiders have attributed the lackluster volume seen in 2016 to the correction of the early part of the year.

It is nearly the opposite scenario happening now at this junction with notional sales during approximately the same 45-day period up nearly 30% from a year ago.

But it would be too soon to rush to conclusions, sources said. First it is unclear if the pullback is over. In addition, the correction of the first 45 days of 2016 lasted longer and did not include an exceptionally strong rally comparable to January 2018.

Paul Weisbruch, vice-president of ETF and options sales and trading at Street One Financial, is not certain that investors should feel fully confident just yet.

Millisecond correction

“We’ve had three up days including [Wednesday]. But I’m not sure the rally will stick,” he said.

“I think people are still scared. They’re not accustomed to a 3% sell-off, let alone a 10% correction.

“Last week was about people getting stopped out, taking on profits. It’s a paradise for day-traders but I’m not sure this market is healthy for institutions. They’re not known to be good market-timers.”

Since Thursday, the U.S. markets are no longer in correction. About half of the losses since the Jan. 26 peak have been recouped.

“It’s too soon to be optimistic,” he said.

“We had a correction for a millisecond because we immediately bounced.

“There are so many unknowns behind this sell-off,” he said, pointing to inflation fears, higher yields, volatility funds and the new Federal Reserve chair.

“To me it was more about people reaching for high returns and taking extraordinary risks at unsustainable levels.

“We’re not out of the woods yet. You can make extraordinary returns if you’re inside a trade. Buy-and-hold right now is incredibly risky.”

Last week was dominated by contingent coupon notes both with calls and automatic calls.

A total of $195 million fit that category, or nearly two-thirds of total volume. It made for heavy volume compared to annual averages. Last year those deals showed a 30% market share.

For the sellsider, investors have become increasingly comfortable with income notes based on contingent coupons, including through worst-of, which is the most common payout for those deals.

“I think investors are still looking for those deals. Rates have increased but are not high enough yet,” he said.

Current market conditions are also encouraging.

“A market correction also means the entry points are more favorable. You get in at a lower price. Volatility premiums allow you to have a put at a lower strike, giving you more defense for the future.”

Long the VIX

An interesting development last week was Barclays Bank plc pricing an additional $961 million of iPath S&P 500 VIX Short-Term Futures exchange-traded notes due Jan. 30, 2019. The ETN tracks a long exposure to the S&P 500 VIX Short-Term Futures Index Total Return index. ETNs are not included in the totals.

The add-on priced a day after the blow-up of Credit Suisse AG’s Velocity Shares Daily Inverse VIX Short Term ETN, which follows the opposite strategy and succumbed to the biggest CBOE Volatility index intraday spike in history during the day it terminated.

This Barclays VIX ETN is listed on the NYSE Arca under the symbol “XYZ.” Since its inception on Jan. 2009, its total principal amount priced has reached $7.68 trillion including last week’s add-on.

Shorting volatility did very well for a long time when the VIX remained at historical lows. But the crowded trade imploded with the recent huge market swings. Barclays’ VXX lost nearly 62% over the past year but is up 5.80% over the last month alone.

“I’m sure that with volatility up, investors now are interested in taking long positions on the VIX,” said the sellsider.

He noted that despite the recent hikes, the VIX is back to lower levels compared to other corrections.

During the record spike last week, the volatility index hit 39 intraday. It peaked at 97 during the bear market of 2008.

“It’s less risky to be long at today’s levels. You have unlimited upside. The shorts get stopped at a preset level. It’s not symmetrical. The odds are in your favor when you’re long,” he said.

Top deals

Last week’s top deal was brought to market by Barclays Bank plc in the form of a worst-of on three indexes. The bank priced $36.04 million of 2.5-year contingent income callable securities linked to the least performing of the Russell 2000 index, the S&P 500 index and the Euro Stoxx 50 index.

The notes will pay a contingent quarterly coupon at an annualized rate of 12.5% if each index closes at or above its 75% downside threshold on any day that quarter.

The issuer had the option to call on any quarterly observation date.

The payout at maturity will be par plus the final coupon unless any index finishes below its 75% downside threshold, in which case investors will be fully exposed to the decline of the worst performing index.

Barclays is the agent with Morgan Stanley Wealth Management as a dealer.

Royal Bank of Canada’s $26.56 million of two-year trigger callable contingent yield notes was the second deal. A similar worst-of deal based on the same three equity indexes, it will pay 15% annual contingent coupon based on a 75% coupon barrier. But the barrier is observed on any trading day, which contributes to raise the coupon despite the shorter tenor.

UBS Financial Services Inc. and RBC Capital Markets, LLC are the agents.

Barclays Bank plc priced $20.03 million of two-year autocallable contingent income securities tied to Bank of America Corp. It was the third offering paying a 9% contingent coupon based on a coupon barrier of 80%.

Barclays is the agent with Morgan Stanley Wealth Management as dealer.

Jefferies’ fixed-to-floating

Interest rates as an underlying asset class are slowly reentering the market.

Three offerings for $33 million hit the market last week.

Jefferies Group LLC priced the top rate deal and fourth largest in size with $20 million of 20-year fixed-to-floating rate notes linked to the 30-year Constant Maturity Swap rate.

Interest will be fixed at 6% for the first three years. After that, the rate will be the 30-year CMS rate plus 75 basis points, subject to a 10% cap per annum.

The top agent last week was UBS with $116 million in 114 deals, or 38.2% of the market share. It was followed by Morgan Stanley and JPMorgan.

“Despite the huge volatility we just had, we don’t see signs indicating that investors have turned bearish.” – A structurer

“I think people are still scared. They’re not accustomed to a 3% sell-off, let alone a 10% correction.” – Paul Weisbruch, vice-president of ETF and options sales and trading at Street One Financial

© 2015 Prospect News.
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