General Electric Co. (GE:US) and Bank of America Corp. (BAC:US) have all but stopped issuing U.S. structured notes tied to interest rates, leading a 3.7 percent decline in sales of the securities this year.
Bank of America’s only such offering in 2013 has been $7.35 million of 10-year notes on June 24, after selling $730.7 million during the same period a year earlier, according to data compiled by Bloomberg. GE, which issues the securities through its GE Capital Corp. unit, hasn’t sold any since Aug. 2. The two companies’ issuance accounted for more than a third of the volume at this time last year.
Investors have held off buying rate-linked securities because they don’t want to get locked into less favorable terms in a volatile market, said Bill Pang, manager of derivatives and structured finance at Toyota Motor Credit Corp. The 10-year Treasury yield has risen to 2.59 percent since Federal Reserve Chairman Ben S. Bernanke said on June 19 that the central bank may slow its $85 billion in monthly securities purchases.
“Given the movements in rates, it’s not surprising to me that they are on the sidelines waiting for the dust to settle before getting back into the market,” Torrance, California-based Pang said in a telephone interview. “You don’t want to be the person who’s buying at 2.5 and see rates go to 3 percent a week later.”
While yields on 10-year Treasuries have advanced about half a percentage point since June 14, Bernanke said that the U.S. needs “highly accommodative monetary policy for the foreseeable future” in response to a question after a speech yesterday in Cambridge, Massachusetts.
Investors bought $72.2 million of callable step-up bonds in June, the slowest month in the U.S. since January 2010, when Bloomberg began collecting comprehensive data on structured notes registered with the Securities and Exchange Commission. Banks have sold $751.4 million of the notes this year, 62 percent less than the year-earlier period.
Callable step-up securities yield a fixed rate that periodically increases until maturity.
Investors bought a total $3.14 billion of notes tied to rates this year, down from $3.26 billion a year earlier, Bloomberg data show.
UBS AG (UBS:US) and Westpac Banking Corp. (WBC), which together issued $86.5 million of rate-tied notes during this period in 2012, haven’t sold any this year, Bloomberg data show.
Meanwhile, 11 other banks have increased sales, according to Bloomberg data. Goldman Sachs Group Inc., the largest issuer of the securities by volume, sold $606.2 million of the notes this year, nearly double the same period last year. Four of its six biggest offerings have been linked to the difference between long- and short-dated constant-maturity swaps.
An improving economy, higher corporate profits and the Fed slowing its stimulus could boost Treasury yields, leading to more investor interest in riskier notes, such as those tied to a floating benchmark, said Millan Mulraine, director of U.S. rates research for TD Securities USA LLC in New York.
Bank of America’s only rate-tied notes this year yield 3 percent for the first year, then switch to 1.6 percent more than the three-month U.S. dollar London interbank offered rate to a maximum of 6 percent annually, according to a prospectus filed with the SEC. The bank distributed the securities for a 1.75 percent fee.
Zia Ahmed, a spokesman for Bank of America, declined to comment on the note sales. Tiffany Galvin of Goldman Sachs, Megan Stinson of UBS, Jan Chessell of Westpac, and Russell Wilkerson of GE Capital, didn’t return requests for comment.
Banks create structured notes by packaging debt with derivatives to offer customized bets to retail investors while earning fees and raising money. Derivatives are contracts whose value is derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.
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