Editor's letter

Demand for structured products is returning, as is demand for credit. Combine the two and you can step back in time two years, when many were celebrating credit's arrival as an asset class in the world of structured products. Back then, the credit used in structures was more likely to consist of constant proportion debt obligations than packages of corporate or sovereign bonds and credit default swaps.

This time around, the credit that is enticing investors is more often corporate bonds, or even sovereign credit default swaps, based on perceptions that now is surely the best time to invest in this paper. At the end of March, the five-year, mid-level CDS rate for the UK was quoted at 131 basis points (bp), while Austria's was 190bp, Greece's was 209bp, and Ireland's was a staggering 269bp. There is a straightforward reason for the escalation in CDS levels for these countries: you get paid more to take more risk. But if you believe that sovereigns will not go bankrupt then this is easy money.

While you can attribute the interest from income-starved investors to greed, you can also see the logic of trying to lock into sovereign paper at these levels. Lehman Brothers may have been allowed to go bust by the US government, but within Europe it is clear that Germany will not allow Austria go bankrupt, for example.

Beneath the ruffle of excitement that selling credit-linked products has created lies another driver. While buying sovereign and corporate credit at today's levels is appealing for the yields on offer, banks are proving eager suppliers of product. And that's the final cog in credit's re-emergence. With constraints on their capital, banks become more reliant on making money from fees. Even though the yield on corporate bonds may be attractive to investors, the fees that a bank can charge for marketing and selling them are relatively low. But if the bank can insert these corporate bonds into a structured product, then the fees ratchet up very nicely. So, while retail investors might find it difficult to buy corporate bonds directly, they may well begin to find it a whole lot easier to buy the structured version.

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