CoCo Bonds and Loco Money

This week started with someone very smart forwarding me a tweet about CoCos, Cuckoos and Cold Turkey. I did wonder if they’d had a weekend break at a magic mushroom farm but they were talking about Credit Suisse and banking stress. More on this later with a look at interest rates and what to expect. (Spoiler alert – I’m in no rush to fix a mortgage).

But first. 2 days till the clocks go forward - YAY. And 12 days until the end of the tax year. YAY?!

If this weekend is the time you need to think about your tax position, or dust off your ISAs or pensions, then our Best Buys tables your portfolio size by provider. Or platform Bestinvest has free sessions with their financial coaches if you’re umm-ing and ah-ing and fancy speaking to someone for a bit of help.

CoCo Bonds send investors Loco

Right. What’s all this business with Credit Suisse then?

When a business (including banks) needs to raise money to fund growth, they have two main routes open to them. They can borrow money and pay some interest in return (debt) or give people some shares in the business (equity). And investors with the money to invest can choose between debt (bonds) or equity (shares).

Bonds are generally seen to be less risky - unless of course you’re lending money to Dodgy.com or GrimLand - and one of the reasons is that if the company or Government you’re lending to goes belly up, and the accountants are appointed to divvy up the spoils, the first people in the queue to get any money back are those with bonds. And shareholders come last, getting the scraps. These are the rules.

Credit Suisse had traditional bonds. And it had shareholders. But like several European banks they also had these ‘CoCo’ bonds. These bonds have the option for the bank to change the investment from bonds into shares (Co for ‘convertible’) or even to wipe them out in a crisis (Co for ‘contingent’ on the price heading south). It’s a safety blanket for a bank and avoids a taxpayer bailout, transferring the risk to the investor.

On the news of a forced marriage with UBS, these CoCos actually jumped (“Oh, it will be OK because here come the posh boys from UBS with their chequebooks and Philippe Pateks”). But then BOOM! The Swiss regulator ripped up these bonds and then KALAMAZAM - just like that - $17 billion of debt disappeared. And the CoCoholders have gone loco because they’re supposed to be first in the queue and don’t the bl**dy regulators know the rules and see you in court, mon ami.

Back in Blighty, inflation is keeping rates high

This uncertainty is not healthy and bank shares have been unsurprisingly wobbly. Not just bank shares either. This is the real danger of a credit crunch – if banks don’t fancy lending (or can’t lend), we can’t borrow, we can’t hire and we can’t spend and everyone’s growth prospects are threatened. Confidence is the real threat which is why the Governor of the Bank of England has been doing the press rounds, talking up the solidity of the UK banks.

Despite this nerve-wracking backdrop, interest rates rose this week in both the US and the UK, with rates here now 4.25%. That shows quite how worried Central Banks are about sticky inflation. It’s like locking up your teenagers even after the party’s over, the plugs have been pulled out of the turntable and the vodka tipped down the sink. They really want to stop this insidious inflation which was triumphantly higher last month. It’s all salad’s fault.

The consensus view is that we are either at or very near the last rate hike, and rates are not expected to go higher than 4.5% in the summer. This means that the 1.4 million households with variable or tracker rates are hopefully approaching maximum pain, and some better fixed-term deals should emerge later in the year. As for the property market, it’s impossible to call, but it is certainly hard to see how prices won’t fall as people’s budgets are so squeezed. That said, there’s still a race for space which should cushion it into a dip not a crash.

Have a good weekend everyone,

Holly

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