TwentyFour AM's Bowie on the attractiveness of corporate hybrids

Combine features of debt and equities

Despite the market rally we have seen in fixed income year to date, there are still pockets of value to be found if a flexible approach and active management is used.

One of our top picks is the corporate hybrid sector. Corporate hybrid bonds combine features of both debt and equity securities. They are callable, subordinated bonds, but coupon payments are fully optional and therefore coupon suspension is the most likely risk, along with the mark to market hit that the bonds would take upon such an event. However, issuers have a strong incentive to call the bond at the first call date due to coupon step-ups and the removal of equity credit. Where are the greatest risks for fixed income investors? From a pricing perspective, corporate hybrids ...