Complex finance hit its highest level since before the 2008 financial crisis

Could Wall Street be headed toward another financial crisis? Complex financial products are seeing a boom the likes of which has not been seen since 2007, with global structured finance transaction volumes hitting USD 380 bn this year, the Financial Times reports. The surge, which has seen transaction volumes surpass their 2021 post-financial crisis peak, is being driven by investor demand for higher yields and bonds — including in significantly riskier assets, the salmon-colored paper writes.

Bonds backed by… wings? This year’s transactions have included bonds backed by unconventional revenue sources, with recent transactions involving fast food chain Wingstop franchise fees and the music catalogues of Shakira, Bon Jovi, and Fleetwood Mac. Transactions involving the more obscure parts of the market have risen 50% y-o-y to USD 63 bn, with analysts expecting further growth. Investments in niche markets rose by 50% y-o-y to USD 63 bn in 2024.

Higher yields are a big part of the appeal: Structured financial products offer higher yields than traditional bonds, making them particularly attractive to investors seeking to channel a growing stream of retiree assets into income-producing investments amid rising borrowing costs.

It also comes as other segments of Wall Street’s business remain sluggish, with the investment banking industry’s fees still below their historic highs. The underwriting fees for structured financial products outstrip those for more conventional activities, like government bonds and corporate debt — no small part of their attractiveness to financiers.

The question is — are the risks being contained? Some investors are raising concerns that investment managers are not properly vetting structured financial products, with some saying that certain buyers are purchasing these products indiscriminately. While analysts cited by the FT claim that the market is as of yet too small to constitute a “systemic risk,” a large portion of these transactions are backed by consumer credit products like credit card loans — which have seen rising default rates since the US Federal Reserve began lifting interest rates in 2022.

One — possibly bad — sign is that investors have shown increasing appetite for the riskiest ends of structured product transactions. Strong demand for low-risk “senior” tranches of this debt has seen banks issue ever-riskier slices of debt — a narrative that bears striking parallel with the risk spiral in mortgage-backed securities that precipitated the 2008 financial crisis.

MARKETS THIS MORNING-

Asian markets are mixed as traders look ahead to China’s annual economic work conference later today, with Hong Kong’s Hang Seng up 0.7%, China’s CSI 300 flat, and Japan’s Nikkei down 0.3%. Wall Street futures are flat once again after another day of losses on S&P 500 and Nasdaq.

THE CLOSING BELL: TADAWUL-

The TASI rose 0.8% yesterday on turnover of SAR 7 bn. The index is up 1.9% YTD.

In the green: Anaam Holding (+6.8%), SRMG (+4.2%), and MCDC (+4.2%).

In the red: Banan (-9.9%), Jahez (-9%) and UIHC (-5.1%).

THE CLOSING BELL: NOMU-

The NomuC rose 0.2% yesterday on turnover of SAR 73.4 mn. The index is up 28.7% YTD.

In the green: Dar Al Markabah (+13.4%), Obeikan Glass (+13%), and UFG (+11.1%).

In the red: Rawasi (-10.2%), First Avenue (-6.9%), and Al Hasoob (-5.1%)

CORPORATE ACTIONS-

The Capital Market Authority greenlit Emaar EC’s request to reduce its capital by 53.8% to SAR 5.2 bn by way of cancelling shares, it said in a filing to Tadawul without disclosing the purpose of the cut.