Risky notes replace easy money for exotics desks

Risk 0419 Formosa Bonds Stephen Lee nbillustration.co.uk — Stephen Lee, nbillustration.co.uk

Robert Mackenzie Smith
Lukas Becker
Chris Davis
08 Apr 2019

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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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