A $64 million steepener note issued by Goldman in 2013 is illustrative of how the flat curve has whittled down its value. The security has recently slumped to 64 cents on the dollar as coupons shrank to less than 1 percent a year, according to TRACE data -- a far cry from the 9.25 percent investors received at the beginning of the term, according to its prospectus. The coupon is calculated according to a formula based on the difference between the 30-year constant maturity swap rate and the five-year rate. A spokesperson for Goldman declined to comment on the product.

Warnings
Issuance has hardly slowed down this quarter, with around $1.9 billion of swap-linked notes sold globally through April 26. Many of these use the steepener structure, offering a high introductory coupon which then switches to a floating rate linked to the steepness of the yield curve.

“Your average person getting these things is Joe Salesman, and they end up losing a lot of money pretty quickly” if the curve flattens, said Pederson.

Banks warn in the prospectuses for the notes that they may pay no interest if the spread between short- and long-term rates moves to zero. They also caution that the returns buyers earn can be lower than those available from traditional debt securities paying interest at prevailing market rates.

Investors in some of the notes even put their principal at risk, as banks issued securities stripped of capital protection amid demand for juicier coupons. FINRA was already warning back in 2014 of the growing number of steepener notes without such safeguards.

“With the continuing low-rate environment, issuers are becoming even more creative with the products they offer, and we continue to see more bells and whistles added to already complex products,” Susan Axelrod, the body’s executive vice president for regulatory operations at the time, said in a speech that year.

‘Extremely Difficult’
For instance, recent notes sold by banks link the floating-rate leg to both the difference between short-term and long-term swap rates and the levels of one or more equity benchmarks, such as the S&P 500 and Russell 2000 indexes. At maturity, if one of the equity indexes is down by more than a certain amount, investors can get around half their principal back, or less.

“It would be extremely difficult to understand this product even after spending a lot of time with it,” said Craig McCann, principal at Securities Litigation & Consulting Group, which works with plaintiffs in securities litigation. “Valuing it would be a completely higher level of difficulty.”

While the difference between two- and 10-year Treasury notes has climbed over the past week to 51 basis points, the gap isn’t far off decade lows.

And the curve looks unlikely to morph into a shape more favorable to investors who snapped up steepener products at par. Strategists from UBS Group AG to Morgan Stanley are projecting the gap will effectively vanish soon enough.