Structured bonds: information for investors
Structured bonds, which have seen a boom in new issues since 2022, pose heightened risks to investors of all categories and offer weighted average yields below the market rate (around 3% per annum). This conclusion was made by the Bank of Russia after analysing redeemed securities in household portfolios over the past three years.
A typical structured bond is a contingent liability. Bonds of this type are offered in the over-the-counter market for a period from one to three years with a coupon of a mere 0.1%. Given that they cannot be sold in the secondary market, the buy-and-hold strategy is the only option available to investors. It is assumed that an investor’s income is generated through one-off additional payments upon redemption. Its amount depends on the change in the value of the underlying asset, such as a stock index, an exchange rate, or bonds/shares of one or several issuers. Structured bonds do not offer what is called ‘capital protection’, i.e. the redemption payment may be lower than the bond’s face value, depending on whether the specified circumstances have occurred.
Structured bonds are issued mainly by banks, brokers, and dealers for retail qualified investors. The said instruments are available via brokerage mobile applications, where clients are offered returns of 20–50% per annum in the event of a moderate or a positive scenario.
However, financial performance analysis has shown that yields on structured bonds are significantly below the market level. They lag behind the yields on the corporate bond index, money market funds, and federal government bonds with comparable maturities. The largest negative yields were generated by structured bonds with exchange rates serving as the underlying asset.
The core problem associated with the structured bonds market is that even qualified investors cannot assess the investment result when purchasing complex products. There is no single formula to calculate the expected yields on the said bonds; neither are there any yield statistics, as structured bonds are not listed on any exchange. Issue conditions contain multiple limitations preventing investors from identifying a realistic scenario. It is impossible to compare issues, due to differences in payment conditions and underlying assets.
An investor needs to be a professional analyst to calculate the expected yields. However, the structured bonds market expands faster than investors are able to realise how complex they are.
The Bank of Russia will continue monitoring the market of complex products to assess the feasibility of regulatory changes.