CoCo Bond Market Index Spreads and Yields

iBoxx EUR Contingent Convertible Index data provided by Markit Group Ltd

i) Contingent Convertible Index Spreads

All the negative price action in the CoCo market has occurred since January. Generally, this bank paper is faring badly because of increasingly dire economic outlook, and that was not most expected this year (including by us). Should these fears prove to be unfounded (unlikely), we could expect a sharp recovery in prices for most of them. Don’t bet on it too early as all we need is one of the banks to announce a coupon suspension and the floor under this market will collapse.

CoCos were supposed to be the “all-singing, all-dancing” capital product created to assuage regulators and fill the depleted capital bucket post-crisis to the new higher required levels. It’s suddenly become more costly for banks to issue them – if indeed they could – and not just for investors to hold. The key message is that CoCos are “designed to fail” without triggering a bank default.

ii) Contingent Convertible Index Yields