Bloomberg News

Investors Buy Most Structured Notes Tied to Banks Since June

January 30, 2014

Sales of structured notes betting that the largest U.S. banks will rise in value climbed to the highest since June, buoyed by the likelihood that an improving economy will lead to increased lending.

Issuers sold $88.6 million of U.S. notes tied to the country’s six biggest banks, including JPMorgan Chase & Co. (JPM:US) and Bank of America Corp., in 12 offerings this month, according to data compiled by Bloomberg. All the securities pay a coupon and can lose value if the stocks plummet from their initial value.

Household spending and business fixed investment “advanced more quickly in recent months,” though the housing recovery slowed somewhat, the Federal Open Market Committee said yesterday in a statement following a two-day meeting in Washington. The Fed also said that labor market indicators, on balance, showed further improvement.

Interest in bank stocks “has to do with potential acceleration in economic growth over the next year, possibly two years,” John Carey, a fund manager at Pioneer Investment Management who oversees about $220 billion in assets globally, said by telephone from Boston.

A healthier economy means that more people are interested in getting loans, and banks “are going to profit from that,” Robert Pavlik, who helps manage about $4.5 billion as chief market strategist at Banyan Partners LLC in New York, said in a telephone interview. Financial stocks tend to rise and fall with economic cycles, he said.

Fed Trims

The six largest U.S. banks also include Wells Fargo & Co. (WFC:US), Morgan Stanley (MS:US), Goldman Sachs Group Inc. and Citigroup Inc. (C:US)Bank of America (BAC:US), which has gained 7.1 percent this month yesterday, and Wells Fargo, which has increased 0.4 percent, are the only two with rising stock prices in January.

The Federal Reserve announced yesterday that it will trim its monthly bond buying by $10 billion to $65 billion, sticking to its plan for a gradual withdrawal from departing Chairman Ben S. Bernanke’s easing policy.

Although home sales dipped in December as cold weather damped interest, 2013 was the best year for new home sales since 2008, according to Commerce Department figures from Jan. 27 in Washington. Demand jumped 16 percent.

Goldman Sachs sold $31 million of one-year notes tied to Citigroup on Jan. 15, the largest offering tied to banks this month, Bloomberg data show. The securities yield 8 percent a year and protect against a 15 percent decline in the stock’s value, according to a prospectus filed with the U.S. Securities and Exchange Commission. They also return 65 percent of share gains above 13.5 percent.

Tiffany Galvin, a spokeswoman for Goldman Sachs in New York, declined to 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 with values derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

To contact the reporter on this story: Kevin Dugan in New York at kdugan4@bloomberg.net

To contact the editor responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net


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Companies Mentioned

  • JPM
    (JPMorgan Chase & Co)
    • $55.8 USD
    • 0.24
    • 0.43%
  • WFC
    (Wells Fargo & Co)
    • $51.49 USD
    • -0.32
    • -0.62%
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