Thoughts and musings from my desk to you.

Structured Notes Deconstructed

We occasionally see portfolios come in for review containing structured notes. There are a wide variety of them, so I will speak generally. Not everything I will say applies to all, but likely most.

A structured note is a bond from a brokerage firm or sponsor which represents an underlying derivative. Most often, this derivative is a set of option contracts. The underlying derivative is what sets the parameters of upside vs. downside and can make them seem like a viable proposition.

Recession on the Horizon

In my last musing, I wrote about the current odd situation where the 30-year Treasury bonds yields 2.58%, but inflation is running at 8% annualized. Who would loan their money to the government for three decades while it is currently depreciating at a rate three times that? To add insult to injury, Treasury bond interest is fully taxable as ordinary income at up to a 40.8% tax rate. That’s a great deal…for Uncle Sam.