Today, the 30-year swap rate trades around 15 basis points higher than its two-year counterpart. On the day before the Fed June 13 meeting it was more than 20 basis points higher.
‘Really Quickly’
“If your capital is at risk, you’re selling a put on the rate spread, which can move really quickly,” said Arthur Teixeira, London-based managing partner at structured-product broker HPC Investment Partners. “These are not conservative products, but allow you to play a specific view over quite a short term -- the counterpoint being that you could pretty easily lose a lot of capital.”
In addition to resembling steepeners, the Deutsche Bank notes are an evolution of a type of rate-linked structured note that was a big seller for banks several years ago. Those notes paid a high coupon and returned investors’ principal as long as the 10-year swap rate didn’t dip below a certain threshold. After falling briefly below 1.5 percent, inflicting paper losses on the notes, the rate has since rallied.
“It is the same product type as the previous best-seller, however the rationale is quite different and it doesn’t offer downside protection,” said Teixeira. “This is consequently more risky. Hence, a greater return.”
This article was provided by Bloomberg News.