CoCo Puffs! CoCo Bonds Underperform in European Credit as Volatility Returns (Deutsche Banks Swoons To 7.81)

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.


Even CoCo bonds can’t prevent the sinking of the once mighty Deutsche Bank.


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