Bond Focus : One Man's CoCo Is Another Man's Junk
This post was written for www.hnworth.com, a site targeting high net worth individuals in Singapore.
Have fun reading !
As we come to the end of the Chinese year of the Horse, markets are ending on optimism which is rightly placed with the European Central Bank readying to embark on their €60 bio bond purchases per month till Sept 2016.
2015 has been a year of many “first’s” with another central bank (Sweden) cutting rates to negative last week as Switzerland making a new world record for the lowest borrowing cost for 10 year money at – 0.011%.
Investors have been driven back to the high yield debt markets as Nestle bonds trade at negative yields and Apple hurries to tap the Swiss franc bond market.
Indeed the past week has been the the best week for junk bonds, year to date, as issuance rose to $9 bio in the US and high yield bond funds saw inflows of $2.9 bio, according to Lipper, the highest since Sep 2014. This is led mostly by oil prices stabilising and Moody’s reporting that default rates are holding steady.
In Asia, markets are calmed as 1MDB, an affiliated company of the government, paying off a loan and Chinese company, Kaisa, sort of out of the woods at the moment.
The reassuring headlines have soothed investor unease and bond recommendations are returning to our mail boxes, along with structured credit options to enhance those yields. I believe I even saw some recommendations to buying Singapore O&G names sometime last week.
That brings me to my topic for today – NOT ABOUT HIGH YIELD CREDITS. For I am not a financial advisor but a responsible citizen writing to a public audience and I will not take to task writing about fads that could fade away as quickly as they started or as oil prices fall again, if we remember the 2014 chase for yields that got us to where we are today.
I can’t find a better word to describe Bank Coco bonds. Might as well invest in Reits.
I used to fall deeply in love with bank preference shares in the past ten years. BASEL-III loss-absorption feature has changed this ex-lover so much that I perceive new issues to be riskier than many of the leading Indonesian plain-vanilla bonds.
Do not forget why most of us invest in bonds in the first place; peace of mind.
Have a safe and healthy 2015 ahead.
Keep an open mind … a watched pot never boils.
FSA in UK cautions against retail investors going into these instruments while domestically they are supposedly marketed to Accredited investors or institutions…post Lehman regulators have learned how to safeguard the man on the street…but if these notes do convert or write down (to zero in some cases)…it will be the AIs crying foul…best to relook ones portfolio to see how much of loss absorption / coco type paper there is…devil is in the details
What is the probability, I ask, if the TBTFs are under the extra scrutiny of Basel 3 ?
Forget ratings, just concentrate on sovereign risk.
hahha, TBTF is only applicable for big US banks. Some Bank Coco issuers include notty-boys from Europe and Asia. 🙂