Risky notes replace easy money for exotics desks

Dealers insist ‘it’s different’ as flat US curve revives bonds that sank the Street in 2008

Stephen Lee, nbillustration.co.uk

For US rates desks, the flattening yield curve signals the end of a once-reliable money spinner, and the return of a complex structured note with a chequered history. Range accruals are back in favour, but hedging these notes is a delicate business and, for some, brings back bad memories of previous losses. 

These exotic structured products pay an above-market coupon if a reference index – typically the spread between two constant maturity swap (CMS) rates – stays within a predefined range. 

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