Contingent Convertibles (CoCos)

Yields on US and European contingent convertible bonds (CoCo) have dropped to 4.2% and 2.7%, respectively, and option adjusted spreads (OAS) are below -1.8 standard deviations for both segments. Investors are flocking to the deeply subordinated notes because negative interest rates and enhanced bank capital buffers have bolstered the appeal of their higher coupon payments. 

Despite their stellar performance in 2019 (US CoCo +20% and EU CoCo +17%) and the limited upside from current levels, CoCos still compare attractively to other bond investments.