CoCo Bond Market Index Spreads and Yields

iBoxx EUR Contingent Convertible Index data provided by Markit Group Ltd

i) Contingent Convertible Index Spreads

We are almost 150bp wider on the CoCo iBoxx index year to end July 2018. That comes after 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 in 2017. 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 – and after some weakness in 2018, it is now half that (B+515bp end September). This year has not been too kind. We are 148bp wider for the index for the year to end September. However, versus the tights recorded in January (B+287bp), the index is almost 230bp wider this year. This is the highest beta of sector not designated ‘high yield’ and the recovery (or any weakness) is amplified as a result.


ii) Contingent Convertible Index Yields