ABN AMRO is purchasing embedded digital options on forward dollar swap spreads to structure a 10-year callable medium-term note. The note offers a 6.3% annualized coupon every day that the 30-year swap rate is above the two-year rate, which is a pick up of up to 130 basis points on 10-year Treasury bonds. Thomas Zieglmeyier, Swiss head of derivatives sales for financial markets in Zurich, said, "This note offers our clients the ability to take a view on the relative rather than absolute values of the 30-year and two-year dollar swap rates as well as offering a higher yield." The two-year rate normally trades below the 30-year rate, however, the market is expecting rates to rise soon and as a result the yield curve is steep. Once the Federal Reserve raises rates the curve is likely to flatten, but if the market then starts to price in fresh rate cuts the curve could invert.
ABN structures the note by buying a series of callable Bermudan options, which gives it the right to call the note and cancel the options. It can call the note after six months and then every quarter. Investors receive the principal and quarterly coupons once the note is called.
Banque et Caisse d'Epargne de l'Etat issued the note. ABN distributes it to its private clients.
