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.
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ii) Contingent Convertible Index Yields