Structured products issuance volume up 29% over year-ago, but sources say caution warranted

By Emma Trincal

New York, March 22 – The structured products market traded sideways last week, and issuance totaled only $348 million in 144 deals, according to data compiled by Prospect News, as more tweets, divisions in Congress and health care reform worries helped drive investor uncertainty.

However, weekly figures need time to be final due to a few days gap between the actual filing on the Securities and Exchange Commission website and the data collection. When adjusted, data is always upsized.

Also it was only the second full week in March, and volume size is always weaker at the beginning or in the middle of the month.

Strong year

On a more definite note: the year-to-date picture is brighter. Volume is up 28.7% this year to $10.06 billion from $7.82 billion last year as of March 17, according to the data.

March so far has been particularly strong from last year, up 122% to $1.59 billion. February volume also surged from last year up by two-thirds to $4.01 billion. It’s only in January that agents sold less than the year before with $4.39 billion versus $4.68 billion, according to the data.

Last year’s correction

“The issuance is up a lot this year because, if you recall, the market had a negative opening last year and didn’t start to recover until mid-February,” said Andrew Valentine Pool, main trader at Regatta Research & Money Management.

“I’m not sure how much of this increase in volume has to do with investors liking this market better versus how much they didn’t like the market a year ago.

“We had a strong rally this year, and there is no doubt that a bullish market increases the desire from investors to buy. But a correction is sure to keep them on the sidelines too. So it works both ways and it’s hard to say which is which.”

A market participant said that the upbeat market was probably the main factor behind the robust volume flow.

“A lot of that has to do with the Trump rally and the high expectations for regulatory easing, tax easing,” he said.

“Now that all of that is up in the air, we’ll have to see if this volume trend continues.”

Policy hopes, political risk

Some analysts already see red flags given the overbought market and the high expectations that have already been priced in around the pro-growth policies of president Donald Trump.

“Uncertainty over whether the U.S. Congress will pass the Trumpcare health care reforms on schedule is raising questions about the viability and timing of other economically important policy proposals,” wrote Paul Donovan, global chief economist at UBS Wealth Management, in a note to clients.

As widely expected, the Federal Reserve raised interest rates a 0.25 point on Wednesday, the second time in three months. A global rally followed the next day, but the S&P 500 index ended flat as stocks traded sideways on Friday.

Investors are focusing more on Washington and less on interest rates, said Pool.

“People are getting a little bit uneasy,” Pool said.

“The market only has so much attention span. It can’t afford to pay attention to the Fed because Trump is consuming all of our brain bandwidth.”

Other factors led him to fear more selling ahead.

“I do think there are more parameters in place to take stock prices lower,” said Pool.

“Take oil prices for instance. If crude supply continues to increase there will be additional pressure on prices.

“Commodities in general seem to be getting resistance.”

Oil prices dropped 10% over the past two weeks.

The “top” deals last week were small, according to the preliminary data.

Risk-aversion was evidenced in the two largest offerings last week, both relatively short but with a digital cap and buffer.

Two separate Canadian banks happened to issue the pair.

Two Canadians

Canadian Imperial Bank of Commerce’s $21.59 million of three-year buffered digital notes linked to the S&P 500 index was No. 1, according to preliminary data.

If the index return was zero or positive, the payout at maturity would be par plus the digital return of 20.5%.

The downside buffer was 17%.

BNP Paribas Securities Corp. was the agent.

Coming next, Toronto-Dominion Bank priced $16.59 million of 18-month buffered digital notes linked to a basket of the shares of all 25 companies listed in the Euro Stoxx Banks index. The basket reweighted the components to a 5% limit.

The digital amount was 22.6%. There was a 10% geared buffer on the downside.

Goldman Sachs & Co. was the agent.

“The CIBC deal was for one client. It was an advisor,” the market participant said.

“It’s interesting to see two Canadian issuers doing the top deals. They could be related but I wouldn’t think so. One is a Goldman deal; the other is BNP. It’s probably more of a coincidence.”

Buffered wanted

Pool noticed the buffers on the relatively short-dated notes.

“A good plan is to have a decent buffer at this point. We could have a turn in the market. Obviously if it’s a longer-term holding, a four or five year, the buffer may not be that beneficial. But after this nice run we had, it’s possible that two years from now we could be below our current highs,” he said.

More attractive buffers are being shown because there is a greater demand for it, the market participant said.

“A lot of people are still skeptical. Market levels are high. It’s best to have some protection, especially a buffer in case things turn out to be like yesterday,” he said.

He was referring to the 1.5% drop in the S&P 500 index on Tuesday, the worst selloff since the November

BofA

“You’re starting to see decent buffers because dealers have to go with what investors want. People aren’t going to go fully in without some kind of protection,” he noted.

BofA Merrill Lynch priced on the behalf of HSBC USA Inc. $16.54 million of six-year autocallable market-linked step-up notes linked to the S&P 500 index. It was the No. 3 deal. The notes were autocallable annually above the initial price at a 6.1% call premium.

At maturity, investors received the greater of the 135% step-up value or the index return.

The barrier level on the downside was 85%.

Barclays was the top agent last week with $71 million sold in 15 offerings, or 20.36% of the total. If was followed by Bank of America and JPMorgan.

Barclays Bank plc was also the top issuer with $87 million in 17 offerings. BofA Merrill Lynch was the agent for two of those issues, which totaled $15.9 million.

“The issuance is up a lot this year because, if you recall, the market had a negative opening last year and didn’t start to recover until mid-February.” – Andrew Valentine Pool, main trader at Regatta Research & Money Management

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