DO NOT DOG ON BANKS
BREAK IN:
At a welcome home family dinner last night, the fact that causing a Bank Run is illegal was brought up . Huh?
Yes it is basically illegal to cause harm to a Bank…. aka create a Bank Run… In today’s Social Media frenzy, this could come in the form of a like, sharing a post or forwarding something to a person of influence .. YIKES…
This is getting LOOOONG… so here is the cliff note version: Coco bonds are European instruments (Not USA) with weird exercise rights that can evaporate an investors money if a Bank gets in trouble. These clauses have been invoked already on a European bank, causing renewed knowledge of these instruments and their weird rights.
Back to our Regularly Scheduled Post
One of the absolute favorite things about the Financial world and our industry is the vast amount of diverse products, structures, programs and for that matter super cult like popularity of instruments that come and go throughout the space of time…. all of which make for constant learning- just continuous!.
Our advanced analysis series is meant to cover very complicated items for our high level collective knowledge…. This is a HEAVY one, just as a heads up!
Advanced Analysis Part 3 – Meet the Coco aka AT-1 Bond – A European thing
Coco’s sizzle because they can essentially be converted at the company’s whim, leaving little control to the actual bond holder!
Bonds are debt instruments unlike Equity (stock ownership) in “MOST” cases that have a front row ownership to the company. Said another way, if something happens to the Company a Bond holder is in most cases the very first person to get paid. Bond holders loan the company money only to hopefully get paid interest on that money and eventually the return of that money in the future.
Convertible Bonds as they are most commonly known, give the bond holder the right to convert or exchange those bonds for another ownership strand of the company. Coco bonds are converted if the Banks hit certain levels, which are stress levels, unlike normal convertibles which are fun/happy levels.
When Coco bonds are converted, investors may actually be taking a step back in ownership (Debt to Equity) have no control in when this happens, and may have large losses immediately for doing so.
Coco bonds do pay more interest, but as some (European banks) are finding out recently, this is not near enough to cover the uncontrolled convert at a less than happy time in the investments life.
Chopped this down a bit, as it is a Monday and wanted to get the Break In to everyone… Just trying to explain, in a very small world, that events across the pond, weird as they may be, have ripple effect here in the USA!
Have a Great “Coco Bond Understanding” Day!
John A. Kvale CFA, CFP
Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
jkfinancialinc
street-cents
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Advanced Analysis … Part 5 … Inverted Yield Curve to Un-Invert/Narrow ? But Differently: The Bear Steepener – Huh ?
We definitely wanted to talk about this, but it is rather complicated, so it makes our Advanced Analysis Series….Part 5
Inverted Yield Curve is a Big Deal
When short term rates are higher than long term rates, a very unusual and non sustaining event, it is called an inverted yield curve.
Here is a list of over 30 – YEP over THIRTY different articles we have written in just the last 5 years if you need a refresher…
The Un-Inversion (the actual process) or at least Narrowing of Inverted Yield Curve a BIG Deal too
Orange line below the white/zero level = Inverted
Maybe Un-invert, or for sure narrowing?
Note orange line headed towards zero or break even…..Narrowing for Sure –
In true it is different this time…. the UN-inversion is occurring because of what is called a Bear Steepener … something we have not seen in a LONG time…
Note going back all the way to the 1980’s, the most prevalent type of narrowing or Un-inversion is a Bull Steepener, or the FOMC (Federal Open Market Committee) lowering rates – noted by the above white line on the chart (2 year Treasury) marked by the arrows….
From Investopedia:
Understanding Bear Steepener
A bear steepener occurs when there’s a larger spread or difference between short-term bond rates and long-term bond rates–as long as it’s due to long-term rates rising faster than short-term rates.
What does all of this mean and why are we talking about it?
Bear Steepeners occur when Capital Market Participants begin to price in higher inflation expectations … OR maybe this time, finally accepting the FOMC is not ready to quickly lower rates! hmmmm
You see now why we went for another edition of Advanced Analysis… Stay tuned on this, we will be monitoring closely and will bring you more as this plays out!
Have a Great “Bear Steepener Reviewed” Day!
John A. Kvale CFA, CFP
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Posted in Advanced Analysis, Economy, Education, FOMC, Interest Rates, Investing/Financial Planning, Market Comments
Tagged Advanced Analysis, Bear Steepener, Bull Steepener, Inverted Yield Curve, Un-Inversion, Un-Inverted