CoCo Bond Market Index Spreads and Yields

iBoxx EUR Contingent Convertible Index data provided by Markit Group Ltd

i) Contingent Convertible Index Spreads

The first half 8-months 2017 have seen index spreads tighten by a stunning 197bp and index yields fall by 180bp. After a difficult 2016, the CoCo bond market is in top form – again. There have been a few new deals, but not enough to satisfy an investor base looking for yield, and in a sector which now seems to be back in favour. The recovery in macro recently has aided the view that banks might have seen the worst.

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 18 months ago – in Q1 2016. Now they’re down at B+445bp and 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. The index spread isn’t even at its tightest level (B+401bp in June 2014), having tightened by 22bp in September. The demand for the product remains solid and several deals were printed in the month. Returns continue to rise, and are at a stunning 13% for 2017 so far! Admittedly, for a product which is designed to fail without triggering a bank default, these returns are super in the current (banking sector recovery) climate.

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ii) Contingent Convertible Index Yields