U.S. markets closed
  • S&P 500

    +105.23 (+2.11%)
  • Dow 30

    +456.87 (+1.18%)
  • Nasdaq

    +460.72 (+2.96%)
  • Russell 2000

    +19.10 (+0.96%)
  • Crude Oil

    -0.32 (-0.41%)
  • Gold

    +4.10 (+0.20%)
  • Silver

    +0.01 (+0.05%)

    +0.0004 (+0.03%)
  • 10-Yr Bond

    +0.0020 (+0.05%)

    +0.0008 (+0.07%)

    -0.0950 (-0.06%)
  • Bitcoin USD

    -431.73 (-0.83%)
  • CMC Crypto 200

    0.00 (0.00%)
  • FTSE 100

    +21.98 (+0.29%)
  • Nikkei 225

    +836.48 (+2.19%)

AT1 bonds surge to best month since before Credit Suisse wipeout

By Harry Robertson

LONDON, Dec 1 (Reuters) - Risky bank bonds that cratered during the implosion of Credit Suisse rallied hard in November, as the market found new energy, climbing around 4% in the best month since January.

Invesco's $1.1 billion exchange-traded fund of additional tier 1 bonds jumped 4.6% last month, while a global ICE BofA index that includes AT1 bonds rose 4.4%.

Both gauges saw their biggest increase in 10 months, aided by the strongest monthly rally in U.S. government bonds since 2011. The ICE index is now positive for the year after dropping 8% in the first quarter.

UBS, which rescued Credit Suisse in mid-March, returned to the AT1 market in style in November, raising $3.5 billion.

Raphael Stern, global head of fixed income index funds at Invesco, said the UBS sale, which saw over $26 billion in demand, has revitalised an asset class that some investors wrote off in the spring.

"There was no debate about whether there was demand for these bonds or not," he said.

AT1 bonds, also known as contingent convertibles, or CoCos, were designed after the global financial crisis. They form part of the capital that lenders must hold as a buffer against losses. They can be converted to equity, or written off if capital levels drop too far.

The roughly $250 billion market crumpled in March when Credit Suisse bondholders got none of their money back. Shareholders typically rank further down the queue, but received the takeover price of $3.25 billion.

Yet things picked up again in November, the best month for issuance in almost a decade. Santander and Barclays also tapped the AT1 market, raising $2.5 billion and $1.75 billion, respectively.

"Lots of people back in the spring, including myself, felt it was going to be a very dire year for the asset class after what happened in Switzerland," Filippo Alloatti, head of financials at investor Federated Hermes. "We’ve been proven wrong."

Alloatti said a dramatic rally in global bonds, which sent yields tumbling in the United States and Europe, also gave investors confidence to return to the riskier corners of the fixed income market.

The premium that investors demand to buy AT1s and other risky forms of bank debt fell sharply in November to around its lowest level in eight months.

Banks still face numerous challenges, however, with interest rates at a record high in the euro zone and many economists predicting a recession next year.

Stern said $19 billion of AT1s in the U.S. dollar-denominated index tracked by Invesco's ETF face calls by the end of 2024, when banks can, but are not obliged to, repay their bonds.

(Reporting by Harry Robertson; Editing by Susan Fenton)