U.S. investors are starting to purchase equity-linked notes with embedded credit-default swaps. In the hybrid notes, investors sell credit protection to pick up yield. Todd Steinberg, managing director and head of equity-linked products at Wachovia Securities in New York, noted that the hybrids have been particularly popular for international issues that reference equities in Latin America.
When investors take equity exposure to emerging markets, such as Mexico, they are implicitly also taking on the credit risk of the country. By selling protection on the country investors get enhanced returns, he noted.
The hybrid structures started to be popular in Latin America earlier this year and have recently migrated to the U.S., Steinberg said.
