Barclays’ $142.17 million leveraged notes on Euro CMS rate follow heavy eurobond sell-off

By Emma Trincal

New York, May 15 – Barclays Bank plc’s $142.17 million of 0% leveraged 30-year Euro Constant Maturity Swap rate-linked notes due Feb. 18, 2020 caught market participants’ attention for its size and the use of a euro rate, a less common underlier than U.S. swap rates, according to sources.

The timing, however, after a rise in volatility in the euro zone bond markets makes sense, they noted.

The payout at maturity will be the greater of (i) $900 and (ii) the sum of (a) $1,000 plus (b) the product of (1) $1,000 times (2) 10 times (3) the difference of the final swap rate minus the strike swap rate, according to a 424B2 filing with the Securities and Exchange Commission.

The strike swap rate is 1.40%. It consists of the initial swap rate of 1.379% plus a spread of 2.1 basis points.

Investors will lose 1% for every 0.1% that the final swap rate is less than the strike swap rate, subject to the $900 minimum payout.

Size

“It’s big for a rate,” a fixed-income structurer said.

“But it’s aimed at institutional investors with 10% principal at risk.”

The trade makes sense amid a recent pickup in volatility in global bond markets.

“For a while we had unprecedented low yields in the European markets with euro rates going near zero,” a fixed-income structurer said.

“Clients believe it’s going to reverse and rates are going to rise. It’s a very efficient way to take that view.”

Short equivalent

The anticipated rise in rates is already happening, he noted, although it’s hard to say if the trend will last.

From June to a month ago, the 10-year yield on German government bonds, or bunds, dropped from 1.40% to 0.08%. But since mid-April, traders unwound these positions amid a sharp eurobond sell-off, which pushed the 10-year Bund yield up 55 bps to 0.63%.

According to some analysts, the recent downturn could have been the result of expectations that the European Central Bank will be hiking rates by mid-2017. Others invoked technical factors such as the fact that bunds were overpriced or that diminished liquidity forced some to sell.

The structurer said the deal is designed to help investors position themselves in the sell-off.

“It’s very difficult to short a bond. This allows them to take that view,” he said.

Using a note format offers a currency-neutral advantage.

“They can stay in the U.S. dollar. You may want to take that view on the rate without the exposure to currency risk,” he said.

Global trend

The rise in yields is a global theme unfolding now, the structurer noted.

The 30-year Treasury CMS rate rose from 2.30% at the end of January to slightly more than 3%.

“Looking forward, I think we’ll see more euro deals. We see a lot of interest for those CMS on the 10-year or on the 30-year,” he said.

“The Euro CMS is an extension of that entire investment theme.”

QE bet

A market strategist saw behind the trade a bullish view on the euro zone economy as investors expect the ECB’s monetary stimulus policy to work effectively in boosting growth.

“It’s a possible bet reflecting the reflation trade on Europe, with QE triggering these trades,” he said.

“People now expect an economic recovery in Europe.

“You barely had positive yields in euro rates. It was negative up to the five, six years. Now it’s only up to the four year. The entire curve has moved higher. The bunds have moved up 60 bps in just one month.

“If QE is working as far as improving European economies, the bunds curve will normalize and rates will move higher.”

There is a risk in the trade if the investors are retail clients, he said.

“Retail investors are known to invest after the action. They saw a sell-off in eurobonds. They are always reacting. Time will tell if this is a good strategy,” he said.

Barclays was the agent.

The notes (Cusip: 06741UVZ4) priced on May 12.

The fee was 3.21%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.