Citibank's Latest 10% Structured Note Could Be Worth A Look

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Citibank latest Structured Note uses the 30-5 CMS spread like a lot of recent issues, but it also has a 9x multiplier making it very interesting.

I’ve written about Structured Notes previously. Most of what is being marketed as Structured Notes, especially those products tied to individual equities or equity indices, should be avoided unequivocally. Yet, I occasionally come across a product that could make sense for those seeking much higher yields than CDs offer on a small percentage of their cash, with only very negligible risk. The Citibank note currently in syndication under 1730T0R50 / US1730T0R502 seems to fit the bill.

This Citibank Note has a 20 year maturity. Even though it is callable earlier, it should not be considered for anything other than a very small amount of money that you do not reasonably anticipate needing in the short or even intermediate term. It returns 10% interest over the first year in quarterly installments. In years 2 through 19, it pays the difference between the 30 year Constant Maturity Swap (CMS) less the 5 year CMS, less 25 basis points, times a multiplier of 9. The CMS rates are observed and payment is determined every three months, at which point the Note pays an quarterly payment which cannot be greater than 2.5% of the principal amount (or 10% a year). (CMS basically tracks LIBOR which basically tracks 10 year US Treasuries at these maturities; you can learn more here).

The Note goes out over 20 years and anything can happen over that period, including a default by Citibank which is the only risk to principal here. The more likely concerns are (1) that we hit a period of hyperinflation where the savings rate goes well above 10%, or whatever the Notes are paying, at some point during much of the next 20 years, and/or (2) that the yield curve becomes very narrow. If there is less than 1.365% of premium of the 30 year CMS over the 5 year CMS, the Note will return less than 10% annually, and for any period during which it is less than 0.25%, it will pay nothing.

However, I believe that any hyperinflation would be short-lived and that there will always be an inherent time premium to the 30 year over the 5 year. I also believe, from looking at the graph below which reflects on the last 7 years and includes both a recession and a recovery, and that that premium is likely to remain wider than 1.365%. Therefore, in my estimation this Note is likely to deliver a 10% annual return for much, if not most, of the next 20 years or until called, and 10% is not a bad return annually.

Author's Note: The author recommends nothing greater than a very small position in these or any debt-side Structured Notes. Most individuals will find current five year CDs to be more appropriate intermediate and long terms stores of cash.

Editor’s Note: We are often contacted at BestCashCow with queries about how to purchase these Notes. Please note that they are available though a broker that is part of the Citibank syndicate, and not through an ordinary Citibank branch.

Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to bank transparency and the climate crisis. Since co-founding BestCashCow in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

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  • Rachel

    June 10, 2014

    Can you sell or trade these notes like you can a bond?

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