iBoxx EUR Contingent Convertible Index data provided by Markit Group Ltd
i) Contingent Convertible Index Spreads
This market took it on the chin in 2018. After a bumpy start, it was weakness right through as single name event risk, coupled with macro and geopolitical concerns as wells huge equity market volatility and weakness gnawed away at the product.
Index spreads widened by 342bp from B+367bp to B+709bp in 2018. And we don’t even have a systemic financial crisis (yet). We’re only 300bp off the widest level seen in this index, recorded in Q1 2016. The index yield pooped higher too, closing 2018 at 6.77% versus 3.49% at the beginning of 2018. In the opening quarter, perhaps longer, we think the market is set to continue to weaken in line with other markets.
There are opportunities with the AT1 market nonetheless. Name selection is key, and the juicier yields on offer, liquidity permitting, will see potential for grabbing some cheap assets with a good pick up.
A word of warning: CoCos are 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. The key message is that CoCos are “designed to fail” without triggering a bank default.
See below for CoCo Index yields.
More for Subscibers:
Rabbit out of the hat
Credit not the only winner... Mario Draghi is a magician. There's little doubt left. Judging by the post-ECB rally in risk assets, the great conjurer has pulled it off again. Increasing Eurozone wage growth, the Chinese relenting on pork imports (out of necessity, in our view) amid rising trade-tariff optimism, US retail sales on the up in August and no-Brexit all fed into t [...]
Draghi: No happy ending
HY/IG compression: Shades of 2016... The President of the central bank might have been a little schackled, but Draghi largely likely got his way in finding some middle ground, enabling him to keep the doves and hawks both content. A compromise 10bp cut on the deposit facility to -0.50% - as well as a tiering system for banks' holding of excess liquidity - and €20bn of QE f [...]
Boneheads? Hmmm, quite
More sticky plaster, please... Negative rates are not natural and nature has a habit of expunging such aberrations. So, an ECB 20bp rate cut must be in the bag! All that's left to ponder is whether any accompanying QE is for €15bn to calm the dissenters, or €30bn to give the markets a turbo boost. For investors, we think it's a case of 'buy the rumour, sell the fact' [...]
Credit takes a much-needed breather
Primary market respite appreciated... Finally some respite from the September daily deluge of IG non-financial corporate bond deals. And it probably helped stave off a deeper bout of indigestion after having seen €26bn printed in this month's seven trading sessions. There were deals but nothing like the massive volumes seen since we returned after the summer. We don't thin [...]
ii) Contingent Convertible Index Yields