Additional Tier 1 bonds, despite their structural risks, have become some of the least volatile instruments in the current turbulent bond market, highlighting a surprising shift driven by yield hunger and investor demand for higher-yielding bank securities.
The latest swings in bond markets have produced an odd outcome: some of the most complicated and risky instruments have become among the steadiest. Additional Tier 1 bonds, the deeply subordinated bank debt issued to meet regulatory capital requirements, have been about 75% less volatile than high-grade corporate bonds on a rolling 10-day basis, according to Bloomberg data. At the same time, more conventional fixed-income markets, especially long-dated government debt, have been whipsawed by worries over inflation, public finances and a heavy wave of company issuance. Bloomberg reported.
That resilience extends a trend seen earlier this year, when HSBC Holdings reopened the AT1 market with a $2.5 billion sale of perpetual notes, a sign that investors were again willing to buy bank capital after a period of disruption. The deal, which came with callable dates in five and a half and 10 years, was priced tighter than the initial marketing range, suggesting demand had recovered strongly for higher-yielding bank paper. Bloomberg also reported that the market has since continued to draw buyers despite the structural risks embedded in these securities.
Investor appetite for AT1 debt has been building for some time. Bloomberg reported last year that spreads on a broad index of European AT1s tightened to record lows, while Nykredit Realkredit in Denmark later set a euro benchmark record with a perpetual bond priced at the tightest ever reset spread for a transaction of its size. That demand has been driven in part by yield hunters searching for income in a market where even investment-grade corporate spreads have been compressed to multi-decade lows, leaving less room for traditional bonds to compensate investors.
The contrast underscores how credit markets have been turned upside down. Instruments designed to absorb bank losses in stress have recently looked calmer than mainstream debt, largely because their higher coupons help cushion price moves when yields rise. But the same features that make AT1s attractive to income-seeking investors also make them vulnerable in a downturn, a point that market veterans have been quick to stress as demand continues to run ahead of supply.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
