Jeremie Boudinet, head of investment grade credit portfolio management at La Française Asset Management, has a similar view. AT1s, which were in the spotlight last year after US$17 billion ($22.8 billion) of Credit Suisse notes were wiped out, are a “leveraged play” on credit spreads’ correlation to government bond yields, he said.
“Spreads are supposed to reflect the health of issuers, but this is not the way they have been trading,” Boudinet said in an interview. AT1 “performance will be correlated to the direction of rates,” which paves the way for good performance in the context of cuts, he said. Boudinet sees only a few name-specific risks in the asset class after the Credit Suisse crisis was resolved.
The market for AT1s, which were created after the global financial crisis and provide a crucial capital buffer for lenders, was shaken last year by the Swiss bank’s writedown of its notes as part of the government-backed takeover by UBS Group AG. It took many months for the asset class to recover, but the market rallied late in 2023, buoyed by a new issue from UBS that attracted more than US$36 billion of orders.
The securities are seen producing outsized gains when rates fall, because they tend to have wider spreads and higher coupons than other debt.
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A multicurrency index of European banks’ AT1s by Bloomberg is down 0.98% in dollar terms since the start of the year, outperforming a global gauge of high-grade bonds but trailing junk debt.
Rates traders are still pricing in several rate cuts by major central banks this year, even though they have moderated their expectations in recent weeks.
