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.