The structured interest rate derivatives business has rocketed over the last month as private banking clients have dived into the market on the back of rising U.S. Treasury yields. Philip Whitehurst, structured medium-term note trader at ABN AMRO in London, estimated business is up 50% on the end of the first quarter, in spite of the holiday period. "There's been an explosive takeoff." Even the U.S. market, which traditionally has a slower take-up of retail structured products, saw around 60 callable MTNs issued last Wedneday, compared to an average of nearer 30 a day last year, said Eric Hiller, chief interest rate strategist at Bank of America in New York.
David Ishoo Mirzayoo, head of the derivatives and solutions group for Europe and the Middle East at Société Générale in London, agreed that there had been a surge in interest rate-linked notes. Strong U.S. payroll figures released two weeks ago caused 10-year Treasury yields to jump 10 basis points in one day, a significant move, because of speculation that an interest rate rise in the U.S. is not far off. "This is a complete shift in sentiment," said Kit Juckes, chief strategist at Royal Bank Of Scotland Financial Markets in London.
Volatility on interest rate options is high at the moment, especially when compared with low equity volatility, and private banking clients are tempted by the high yields generated by selling options in callable products, noted Ishoo Mirzayoo. Investors are also beginning to look for longer tenors. "We have traded 15-20 year structures, even for private banking clients," he continued, adding that these clients were usually focused on the front end of the curve. The most popular investments have been callable products and structures with a 'ladder' feature that allows investors to lock in gains, according to ABN's Whitehurst.
Demand for hybrid products, which combine asset classes to increase yield, is also keeping interest rate structurers in business, said Philipp Orgler, co-head of interest rate derivative structuring at Deutsche Bank in London. "There is great demand for equity and interest rate products," noted Orgler. This business is currently limited to private banking clients, but it is likely to move across to the institutional market because it is a clear way of increasing equity yield, he added.