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 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 24 months ago – in Q1 2016. Now they’re down at B+362bp 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. The index spread widened off its record low by 63bp in mid-November (B+414bp), but recovered well. The demand for the product remains solid and deals were printed in the month. Returns continue to rise, and delivered a stunning 17% in 2017!

The index yield is off the record low of 3.26% (end October), now at 3.43% – and going lower?


ii) Contingent Convertible Index Yields