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Recent Changes in the US Treasury Yield Curve: Implications for Structured Products

The US Treasury yield curve has undergone notable shifts in recent times, signalling nuanced market sentiments regarding the state of the economy. The bear steepening of the yield curve suggests a scenario where the market anticipates that high-interest rates will no longer adversely impact the economy. However, it also implies the expectation that the Federal Reserve (the Fed) will maintain this high-interest-rate environment for an extended period.

In such a distinctive economic landscape, structured products, a diverse category of financial instruments, have felt the impact of these developments. In this week’s analysis, we dissect the monthly sales volume of structured products by their respective terms. What becomes apparent is a substantial surge in sales volume across most terms, contributing to an increase in the average term. Notably, this growth is predominantly attributable to the emergence of 4-year term products, which have seen significant popularity.

The surge in the 4-year term can be largely attributed to the high number of autocalls reaching maturity and subsequently being replaced by similar products with a 4-year term. This shift in investor preference underscores the adaptability of the structured product market in responding to changing economic conditions and investor demands.

Now, delving deeper into this transformation, we can identify the winners and losers among market participants. JP Morgan emerges as a standout performer, excelling in the 5-year and longer-term products, as well as in the widely favored 2-year term category. Conversely, Goldman Sachs and Morgan Stanley appear to be facing stiffer competition in the longer-term product offerings among the top five issuers. Notably, Goldman Sachs has made strides in enhancing its competitiveness in the short-term product segment (1 year or less) over the past two months.

When looking at all other remaining issuers, there’s much more distribution in the 4 years term, while Citi, the 2nd in the issuers league table, is competing mostly in the 2 years and 5 years term, but far from successful in the longer term dated products, which is lead by Goldman.

Chart of the week

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