Posts Tagged ‘Cocos’

Bond 2014

Posted: January 22, 2014 in Uncategorized
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2014 for the bond market will be much of the same.

Interest rates will stay low – in Australia possibly going even a bit lower.

So corporate bond, specially fixed interest, will be the prized asset of the year – the investor will lose a bit at matury (often they are at premium), but the interest will more than compensate that.

In the second part of the year inflation fears will appear so will see a movement towards floating rates nond and inflation linked bond.

For an Australian investor an interesting play would be foreign corporate bond as the Australian DOllar is weakening.

The novelty of the year are the Contingent Convertible Capital Securities (nickname Cocos).

They are not really new (last year new hybrid securities they were all Cocos).

They are Hybrids that substitute the old hybrids (step up securities) under Basel III.

What usually people do not understand is that they are much more risky than the previous hybrids as there are non-viabilities clauses and default/forced conversion triggers embedded as they are made as capital of last resource if the entity does not meet the capital requirements (specially true for European banks).

They pay more than the old hybrids (as spread from benchmark) as they are more risky. So just be aware of what you are doing. Trigger events are remote, but far from impossible.