May 13, 2020 - (Gold Market Wire) - Central Banks are hiding the real price of risk with their zero percent interest rate nonsense. Everyone knows that. So where is the real price of risk found? Well, one place is in the magical land of AT1 Contingent Convertible Bonds, aka “Coco Bonds” where the real price of bank failure is being sourced.

So, if you want to go for a ride on the real financial roller coaster of risk, saddle up and buy a ticket that is guaranteed to provide the wildest ride of your life – European CoCo Bonds.

What's a CoCo Bond? Well – they are high risk bonds on European Bank Debt, and they were last year's “yield chase” darling. Technically they are called AT1  bonds as they are additional tier 1 Capital bonds, which are the first to get smashed if banks have solvency troubles. Ergo – the vertiginous ride.  “Contingent convertible” Bonds which means they get converted to equity when the banks stock price gets smashed...they're like having a leveraged bet that depositors are about to be bailed in (if you short them)... the chase for yield by the buyer is a bet against bank resolution, so when it looks like banks are about to go under – and the banks are about to bail in depositors, these bonds start to collapse. And Banks like UBS, Credit Swiss, Barclays, Lloyds, Soc Gen and everyone's favorite toxic entity, Deutsche Bank have been issuing them like crazy... to the tune of about $100 billion.

They are there to provide capital to banks in resolution. In fact, their very creation was part of the official plan for “bank resolution” i.e. -Bail-In of uninsured depositors...which most depositors are. They are strange hybrid securities and the idea behind them is the buyers get an enormous yield for taking bank risk, and if the bank fails, the bonds convert to worthless, or near-worthless, equity (or face complete write down) and issuers of the bonds use the funds received as part of the resolution. (Who keeps coming up with these things?)

Interestingly, like Credit Default swaps, (those ones where default kinda/sorta happened but officially didn't happen while the buyers were hung out) the mechanical and discretionary trigger levels that cause the 'contingent' convertibility to equity aren't completely clear. But since they do trade, what has been clear is that they took a 30% swan dive in the month of March...while Gold got tagged for about 9% at its worst - during the sell everything in sight mad-March blow out.

AT1 bonds are pricing the REAL risk of a banking collapse in Europe, and boy do they look terrible. For excitement, not even the junk bond market has so many thrills and spills, unless of course you consider European Banks to actually be junk... which, in reality, they are.

Recently CoCos have moved from 106.5 to 74.5, in the underlying, in just a couple of months. If you like volatility – you've found it.

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Keep an eye on them, because they will be the true canary in the coal mine of the coming collapse of the global, integrated banking system. Not just because of their AT1 composition, but because they are European Bank bonds. And those will be the first to collapse.

Until then, the reach for the “brass ring” of yield goes on and people keep getting burned. They are incapable of learning because, in truth, they are that desperate.

And, of course, through all of this, Gold is considered a weak investment, because it “has no yield”.

It's up only 20% in six months

The Clown Show continues. And Gold keeps on rising.

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