In the not-so-distant past, the global banking system faced turmoil, with multiple American lenders collapsing and European behemoths scrambling to stay afloat. Amidst this chaos, the once-promising AT1 bonds—also known as “CoCos”—were called into question after the collapse of Credit Suisse. This sparked panic and led to a surge in AT1 yields as investors fretted over the future of these bank securities.
However, fast forward to today, and the AT1 bond market is not only alive but thriving. According to Dealogic, a data provider, November 2022 was the third-strongest month for AT1 bond issuance in the past two years, with several major banks, including Mitsubishi UFJ, Barclays, and Société Générale, jumping back into the market. Even UBS, under the same Swiss regulatory regime that toppled Credit Suisse, successfully sold $3.5 billion in AT1 bonds.
The return of the AT1 market has prompted some to question the memory of investors, as the enticing yields seem to have overshadowed the previous risks. However, it also reflects a more optimistic perspective: that the Swiss debacle was an outlier, and the majority of AT1 bonds have been redeemed, indicating the strong financial health of issuing banks.
This revival of the AT1 market also offers insights into the broader financial landscape. With low expected returns in the corporate bond and stock markets, AT1 bonds are standing out with yields that are attracting investors’ attention. In a world of shrinking risk premiums and unimpressive yields from traditional investments, the healthy returns of AT1 bonds are capturing the interest of those seeking higher rewards.
Looking ahead, the AT1 market is expected to face a pivotal year in 2024, with several bonds reaching their first call dates. However, if corporate bond spreads remain low and the stock market remains expensive, the demand for AT1 bonds is likely to persist as investors continue to hunt for greater returns.
For more insights into financial markets, check out our columnist Buttonwood’s recent articles, including a review of a new book on Ray Dalio, an alternative to the S&P 500, and the potential impact of a third world war on investors. Also, learn about the origin of the Buttonwood column’s name.
So, in a year filled with uncertainty and volatility, the outlook for AT1 bonds remains surprisingly bright, offering investors a promising opportunity amidst an otherwise lackluster market.
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