Structured products issuance $565 million for week amid big stock and bond rallies

By Emma Trincal

New York, Nov. 22 – Last week’s tally for structured notes issuance was $565 million in 142 deals, according to preliminary data compiled by Prospect News. It was the third winning week for the stock market, which welcomed better-than-expected inflation data, according to government data released on Tuesday.

Inflation relief

On a year‐over‐year basis, total CPI was up 3.2%, versus 3.7% in September, according to the U.S. Bureau of Labor Statistics.

Treasury yields dropped on the consensual view that the Federal Reserve has ended its rate hike cycle. The Nasdaq jumped 2% on Tuesday.

“Saying that both bond and stock markets liked the numbers is a vast understatement,” said Steve Sosnick, chief strategist at Interactive Brokers, adding that the root of the bond and stock rallies was “rooted in the perception that rate cuts are done.”

Single underliers

Index-linked notes issuance dominated the flow last week with 73% of total sales, or $415 million, according to the data. The presence of worst-of was limited. Two-thirds of the index volume, or $280 million, came from single index underliers. Worst-of made for only 15% of index issuance, the rest going to weighted baskets of indexes.

A structurer attributed the lower weight of worst-of to changing pricing conditions.

“Rates have dropped recently but they remain pretty high,” this structurer said.

“You can get better pricing with higher rates than earlier,” he said.

Worst-of are one tool among others issuers will use to extract premium when their options were limited, he added.

“Earlier this year, when rates were much lower, they had to use worst-of to improve headline caps or headline coupons. Now it’s easier to do without it,” he said.

Mark Dueholm, chief fixed-income trader at Landolt Securities, was not sure if the trend last week was significant.

“It could come down to a few big clients looking for single index notes and putting a larger chunk of money in it,” he said.

King S&P

The S&P 500 index continued to top other indexes, but its dominance was significant last week. A total of $125 million was priced on the S&P 500 index alone. It represented 30% of the issuance volume of index notes.

Out of 80 index-based deals, 34 were tied to the S&P 500 index.

“There’s a lot more demand for S&P notes. It’s always been the case but even more so today,” said Dueholm.

“The S&P is far less volatile than the Nasdaq, which can move a lot in either direction. The S&P makes for much safer investments.”

For the structurer, the bid on the S&P 500 reflected the market’s enthusiasm for the so-called “Magnificent Seven” stocks. This group of seven mega cap tech stocks account for the lion’s share of the S&P 500’s bull run.

“The S&P is very much concentrated in the top Magnificent Seven names. As a market-cap weighted index, its allows you to capture the tech momentum. You don’t get those names in the Dow or the Russell. You do get them in the Nasdaq, but the Nasdaq being mostly tech is less diversified and more volatile, which many investors want to avoid,” he said.

Leverage vs. autocalls

Issuance of leveraged notes was nearly on par with income products, the former accounting for 35% of the total and the latter, 30%. Those market shares contrasted with the year-to-date distribution showing 20% for growth and 47% for income.

“On our end, leverage and income are always pretty balanced from what we see,” said Dueholm.

“It may actually be tilted a little bit more toward growth. But it depends.

“Right now, demand for growth is a bit challenged because rates are much higher. People don’t want to sacrifice income and hold a note to maturity without getting anything when they can get good income along the way in cash or Treasuries.”

Things could change if rates continued to drop as they have this month.

Shift in sentiment

Since its peak on Oct. 18, the two-year Treasury yield dropped from 5.24% to 4.84% on Friday. The drop is based on Fed easing expectations.

“Everybody is assuming that the Fed is done with rate increases and that they’re going to cut. It’s amazing how the market can go from one extreme to another,” he said.

“Inflation came out slower than expected last week so people now are saying: the Fed won’t be raising rates anymore. Are they right? I’m not sure. They’ll be right when these assumptions become a certainty and when we finally know what the Fed is going to do. Right now, the Fed itself has no idea what they’re going to do.”

For Dueholm the battle against inflation is not over, with the rate still above the Fed’s 2% inflation target.

“The stock market is euphoric right now because they expect the best of both worlds: no inflation and no recession. “We’ll see if rates are going to continue to fall based on these assumptions,” he said.

Stocks

Single-stock issuance made for 14% of the total in 42 deals totaling $77 million.

The top stock deal was linked to Microsoft Corp. and issued by GS Finance Corp. for $10 million.

The structure featured a 12.35% contingent coupon, an 85% coupon barrier and a 15% geared buffer at maturity. JPMorgan was the placement agent.

The “Magnificent Seven” stocks were the most widely used as always. Those included Amazon.com, Inc., Nvidia Corp., Alphabet Inc., Tesla, Inc. and others.

Newsworthy

An underlying index not used in nearly two years popped up last week.

JPMorgan Chase Financial Co. LLC priced $1.16 million of five-year uncapped digital notes linked to the FTSE 100 index.

The payout, which is triggered at-the-money, is the greater of the index return and 50.5%. The protection consists of a 60% barrier.

The market saw a few bear notes of late. An intriguing one, which priced during the previous week, was GS Finance’s $1 million of bearish absolute return notes on the Nasdaq-100 index due March 28, 2025.

Investors will get 1.26 times the absolute value of the index if it declines by no more than 40%. Otherwise, the payout will be par. Those structures are known as shark notes in that the cap is replaced by a knock-out, which eliminates the participation.

Top agent, issuer

GS Finance was the top issuer last week with 29 deals totaling $242 million, or 43% of the total.

It brought to market the top offering in $37.11 million of S&P 500-linked dual directional notes due Dec. 3, 2025. The payout consists of 1.5 times the gain capped at 20% on the upside and a 15% buffer for the downside protection.

Morgan Stanley was the top agent with $149 million in 20 deals, or 26.3% of the total.

It was followed by UBS and JPMorgan.

Issuance volume for the month through Nov. 17 is up 3.4% to $2.93 billion in 542 deals versus $2.83 billion in 713 offerings during the same time last month.

For the year to date, the tally is down only 1.3% to $82.84 billion in 20,088 offerings from $83.96 billion in 25,663 deals a year ago.

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