JPMorgan’s $16.88 million floaters tied to CPI seen as appealing in inflationary environment

By Emma Trincal

New York, Nov. 22 – JPMorgan Chase Financial Co. LLC’s $16.88 million of floating-rate notes due May 15, 2026 linked to the Consumer Price index are welcome in a rising rates and inflationary environment, sources said.

Interest will be equal to the year-over-year change in the Consumer Price Index, subject to a floor of 0%.

Interest will be reset and payable monthly, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus accrued interest.

Recent comeback

After having virtually disappeared since the beginning of 2019, CPI-linked notes reemerged in the spring.

Until May 2021, the 12-month percentage growth of CPI was under 5%, according to the Department of Labor. CPI growth peaked in June at 9.1% year over year.

In April of this year, Morgan Stanley Finance LLC priced the first CPI-linked note since 2019 for $1.53 million. The 10-year fixed-to-floating rate notes paid a fixed coupon of 7% per annum on the first year followed by a floating rate equal to the year-over-year change in the CPI. The interest was capped at 7% per annum. Principal was fully protected.

Since then, issuers have brought to market $62 million in 15 offerings of CPI-linked notes, according to data compiled by Prospect News.

In addition to Morgan Stanley and JPMorgan, Citigroup Global Markets Holdings Inc. and Bank of America Corp. have also issued notes pegged to inflation this year.

Floaters

JPMorgan’s recently priced deal was a positive development, according to a rate products trader.

“It’s a plain-vanilla note that bodes well for people trying to diversify their exposure. You have different kinds of floating-rate notes. Some give you exposure to the curve, others to interest rates, this one to inflation. Having those exposures is a good combination in a fixed-income portfolio,” he said.

The timing was right too, he noted.

“Floaters make sense in a rising rates environment because they’re adjusting to the market.”

The current state of inflation was likely to provide decent income stream to investors in the notes, he said.

“Your principal is protected but the coupon is at risk. You could in theory earn zero coupon if the inflation declines. We certainly hope that inflation goes down,” he said.

Cooling off slowly

The last read on inflation released earlier this month for October showed a year-over-year CPI growth of 7.7%.

“It’s a high level of inflation and it’s going to take some time to come down. But even if it goes down to 3% or 4%, you’re still ahead of the game,” he said.

Inflation will grow but at a slower pace, he predicted.

“We won’t see a collapse in the CPI index any time soon. Going into the winter months, we may even see a pickup. Fuel will be the contributing factor. We won’t break inflation until the spring if we’re lucky. In the meantime, people are feeling the inflation pressure. Go buy a dozen eggs! Food prices are higher. Heating oil, propane, diesel... Everything is up,” he said.

Bond alternative

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, said he does not expect inflation to be fixed in the near future. This gives the notes time to deliver competitive yields.

“It’s attractive because you’re not going to be able to get those rates in fixed-income. I think with this note, you’ll get at least 5% or 6% for the next four years, probably more. I can even see 6% or 7% over the next few years,” he said.

If the government succeeds in controlling inflation, investors would face the risk of losing their income payments.

“If inflation goes negative, you don’t lose your principal. You just lose your coupon. But that means we would be in a deflationary environment, so you’re not losing money the way you lose money when inflation erodes your return,” he said.

Chisholm does not expect such scenario.

“We will continue to have inflation for some time. The CPI will remain higher than most fixed-income. At least for another year, you will be able to get a better rate,” he said.

The notes (Cusip: 48133PBE2), which carry a fee of 3.5732%, settled on Nov. 17.

JPMorgan priced $10.88 million of a nearly identical offering. Those notes (Cusip: 48133PAT0), which priced on the same day, were one-year shorter with a 1.6863% fee.

J.P. Morgan Securities Inc. is the agent for both deals.

All notes are guaranteed by JPMorgan Chase & Co.

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