Halister News

(Bloomberg) -- Investors are effectively investing in a short-term instrument with a positive interest rate return given a high probability of early redemption of the note, writes Commerzbank strategist Markus Koch, in a client note.

• Buy step-up callable note with a 20y term coupled with a short-term, non-callable period to benefit both from short long-tail gamma and from a fairly stable rates outlook at the short end (20yNC1)
• The note pays a fixed coupon of 0.5% p.a. for the interest rate period up to the single call date after 1-yr
  • Thereafter, coupons will be stepped up to 2.3% p.a. if the note is not called
• Assuming rates were to stay low with a bias to still lower levels for a 1-yr horizon, the implied call probability increases further from currently lofty levels, reaching almost 80%
• Structure will be redeemed early only if it is to the issuer’s benefit, i.e. when market rates for matched- maturity rates are lower than the coupon