(Bloomberg) -- The yield on European CoCos has fallen to a record low, amid increased demand for the riskiest type of bank debt from investors seeking to beef up returns.
The average yield on the notes closed just below 3.42% on Wednesday, according to a mixed-currency Bloomberg Barclays index. That beat the previous record reached in February 2020, just before a rout caused by the coronavirus pandemic tore through European markets. The index hit 15% at the height of the sell-off last March.
The milestone underscores the strength of demand for the bonds, also known as Additional Tier 1s, as investors trawl riskier parts of the credit market to bolster returns in a world of ultra-low interest rates. The bonds are senior only to equity. Yields on non-financial junk bonds have also collapsed.
“We now prefer AT1s as the most attractive source of beta,” BNP Paribas SA analysts wrote in their June credit outlook, adding that their shorter duration compared with other types of similar-yielding notes also makes them less volatile.
Shrinking CoCo yields also reflect the banking industry’s improved bill of health -- so much so, that investors including BlueBay Asset Management reckon the asset class is fundamentally mis-priced. The resilience of lenders during the economic tumults brought on by the pandemic crisis contrasts to the 2008 global financial crisis, when banks were in the eye of the storm.
BlueBay Sees ‘Incredible Value’ in Risky European Bank Bonds
Capital buffers built up over more than a decade are key, because they cushion the risk of coupons being canceled or investors being forced to bear losses.
The feared plunge in bank asset quality due to economic scarring from the virus lockdowns has also yet to emerge, thanks to wide-ranging support for consumers and businesses in the form of cheap borrowing costs and government-mandated programs to shield incomes.
©2021 Bloomberg L.P.
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