- Cocos are designed to transfer the risk of a bank failing from governments to bondholders, avoiding a repeat of the bailouts that scarred taxpayers during the financial crisis. For this reason, they offer high levels of return to compensate buyers.
And that’s helped stir their recent recovery. Unlike sovereign and corporate debt, the European Central Bank isn’t buying unsecured bank bonds as part of its stimulus programme. While yields in many other portions of the bond universe have been compressed by the ECB hoovering up debt, yields on coco bonds stand out.
RBS’s latest bond of this type, with a rating of single B from S&P, pays a coupon of 8.625 per cent.
So ECB is squeezing folks into riskier assets since they are competing for less-risky ones?
I read about a similar effect occurring due to an upcoming money market mutual fund reform that is being reflected in the recent increase in LIBOR. In short, banks are being forced into riskier assets in the hunt for yield.