With interest rates at microscopic levels, many investors are turning to structured notes to boost their returns.
These investors may soon be in for a rude awakening, says Chris Whalen, managing director of research firm Institutional Risk Analytics.
Structured notes are generally bonds with a derivative attached.
For example, a structured note might be indexed to the S&P 500. If the S&P gains, the amount of that gain turns into the note holder’s interest income. If it falls, you receive no interest.
Banks have sold $26.8 billion of structured notes so far this year, according to Bloomberg.
“The only trouble is that the firms originating these ersatz securities . . . have no obligation to make markets in these OTC (over-the-counter) structured assets or even show clients a low-ball bid,” Whalen wrote in a report obtained by Bloomberg.
“These same firms are busily creating the next investment bubble on Wall Street — this time focused on structured assets based upon corporate debt, Treasury bonds or nothing at all — that is, pure derivatives,” Whalen wrote.
If you’re looking for a similar but safer investment, you might consider indexed CDs. They can juice your return by tying interest payments to the performance of another market, but protect your principal in an FDIC-insured CD.
“It’s an investment you might want to hold now,” Chris Geczy, an investment expert at University Pennsylvania’s Wharton School, told Moneynews.
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