CoCo Bonds (aka, contingent collateral) bonds were once heralded as the safety net for banks. It was even proposed in a Congressional hearing for US mortgage giants Fannie Mae and Freddie Mac as the ultimate safety net. Unfortunately, CoCo bonds have proven more risky for investors than previously thought.
(Bloomberg) — European CoCo bondholders are nursing losses of 1.8% this week, as surging volatility amid an intensifying U.S.-China trade war hurts the riskiest form of bank debt.
The losses outstrip declines of 0.2% for euro IG bonds this week and of 0.8% for euro HY bonds, based on Bloomberg Barclays indexes
YTD euro IG is still up 3.79% through May 9, the best performance since 2012, while HY’s 5.59% gain is also the best since 2012
CoCos have gained 8.95% in the best start to a year since 2015; the notes have benefited from the search for yield as dovish central banks compress returns in safer assets
For example, the Deutsche Bank 6% Perpetual (CoCo) bond is yielding 10.37% and priced at 89.30.
Of course, Deutsche Bank’s equity has plunged from over 120 to 7.78 today.