Corporate Hybrid Bonds offer a compelling diversification opportunity. Unlike CoCos, Hybrids exhibit lower volatility, stronger incentives for first-call redemption, and cash-cumulative coupon deferral, making them a more stable and liquid option. With imperfect correlation to CoCos, hybrids can further enhance portfolio resilience, especially amid market disruptions.
- The Corporate Hybrids (“CH”) to Contingent Convertible (“CoCo”) absolute z-spread differential has narrowed, and has been trading tighter than the long-term (10 years) average of 100 basis points since 2024 to date, partially due to CoCos’ higher beta nature in an up market. However, CoCo’s higher likelihood of extension could see this spread basis widen again, presenting good relative value in Corporate Hybrids.
- For example, we saw CoCos spread shot up in both 2020, during covid outbreak and 2023, Credit Suisse event, which widened the basis to Corporate Hybrids.
- From a portfolio diversification perspective, Corporate Hybrids can provide both risk reduction and return enhancement to portfolios holding traditional Investment Grade and High Yield credits.
- Corporate Hybrids also has an imperfect correlation to CoCos, adding diversification benefits to portfolios with existing CoCo exposures.
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