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Hybrid ups and downs

Hybrid product has been a key part of the provision of yield to hungry investors this year, as it was in 2004. Historically low yields explain the boom in the structured interest rates business. Products such as constant maturity swap (CMS) notes have dominated much of the action. The emergence of retail investor interest for these types of structures was of particular benefit to astute bank and insurance hybrid capital issuers.

"EMTN structured note CMS activity continues apace," says David Marks, head of debt capital markets for financial institutions and frequent issuers at JPMorgan. "It is an established and appropriate asset for private-bank clients and similar investors. But its use as a vehicle for hybrid capital raising has been exposed."

Both French and German regulators have ruled out leveraged CMS products, such as curve steepeners, as a tier 1 qualifying instrument.

The development of the perpetual non-step-up institutional market in euros, sterling and US dollars for financial hybrids is a particularly telling development, says Amir Hoveyda, co-head of capital markets at Merrill Lynch. "It is proof that market technicals are extremely strong," he says.

He thinks the immediate future is relatively rosy for issuers because, in addition to institutional investors buying non-step-ups, traditional retail distribution in both euros and dollars is gathering pace.

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