CoCo Bond Market Index Spreads and Yields

iBoxx EUR Contingent Convertible Index data provided by Markit Group Ltd

i) Contingent Convertible Index Spreads

2017 saw index spreads tighten by a stunning 300bp and index yields fall by 280bp. After a difficult 2016, the CoCo bond market was in top form. There had been a few new deals, but not enough to satisfy an investor base looking for yield, and in a sector which was in much demand. The recovery in macro recently has aided the view that banks might have seen the worst.

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.

The spread on this index was up at B+1002bp – only 30 months ago – in Q1 2016. Now they’re down at B+376bp and that is even after we have had a couple of ‘events’ for lower rated Club Med banks, which have been brushed aside as investors differentiate between the good, bad and ugly of this asset class.

However, 2018 has not been overly kind. Admittedly, we’re only 13bp wider for index for the year to end April, but versus the tights recorded in January (B+287bp), the index is 90bp wider this year. Any recovery also seems laboured as the bid for this risk asset has faded.


ii) Contingent Convertible Index Yields