CoCo Bond Market Index Spreads and Yields

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 but there are no such misgivings in 2019. Returns have zoomed higher and exceeded 12% in the period to end September, while spreads in the index have tightened by over 200bp.

The opportunity has been based around need. Investor need for higher yielding, juicier assets as underlying yields have crunched lower amid central bank cuts and ahead of the next leg of the ECB’s QE programme. Fundamental credit quality of the banking sector seems relatively stable in 2019 (amid some signs of deterioration 2018, aka Deutsche Bank) which has ultimately helped sentiment.

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