AT1 Bond Spreads Widen for European and US Banks, Pushing Up Funding Costs
nashnova research
The average spread on European and US bank AT1 bonds has rebounded to 253 basis points from a record low below 200, and year-to-date returns have dropped from 3.6% to 1.6% — banks now pay more to issue new debt, and existing holders are losing money.
Why did AT1 spreads suddenly widen?
The average spread on AT1 bonds — the riskiest capital instruments banks issue, first in line to absorb losses — has climbed to 253 basis points. Between August and September, it had dipped below 200 bps for the first time ever.
This means → the "risk premium" the market demands for these bonds jumped more than 50 bps in a matter of weeks. Buyers stopped accepting cheap prices.
Four forces are squeezing risk appetite simultaneously: rising energy prices, higher inflation expectations, tighter monetary-policy outlook, and turmoil in French government debt.
What resistance are new issues hitting?
BNY Mellon's latest preferred-stock issue priced at a spread more than one-sixth wider than its post-war low set this summer.
Belgian lender Belfius Bank's AT1 bond fell below par immediately after issuance, trading at about 99 euro cents on Friday. In plain terms = buyers lost money on day one, down nearly 1 euro cent from the issue price.
Banco BPM's €400 million AT1 saw its order book shrink from roughly €1.5 billion to €750 million during the roadshow, because the issuer insisted on tighter pricing. This reflects a willingness by some banks to sacrifice half their orders rather than give investors a better deal.
What risks do existing holders face?
Year-to-date returns on AT1 bonds have slid from 3.6% in late August to 1.6% — more than half the year's gains evaporated in weeks.
Atlanticomnium fund manager Romain Miginiac warned that bonds with very low reset rates and distant call dates will come under pressure once extension risk — the possibility that banks choose not to redeem them — starts to surface.
This means → if the market keeps weakening, AT1 bonds locked into low coupons with no near-term call have further room to fall.
Has the market actually shut down?
Not yet. Global AT1 spreads are still about 160 bps below the historical average since the asset class launched after the financial crisis. In plain terms = funding costs are higher than summer, but on a decade-plus view they remain relatively cheap.
ABN Amro credit strategist Shanawaz Bhimji argued that if the yield curve steepens and banks deliver on their net-interest-income guidance, spreads could still tighten.
Morgan Stanley's Charles-Antoine Dozin said: "We most likely won't go back to where we were before the summer." But current levels are historically attractive, and pragmatic issuers can still get decent-quality deals done.
What is the smart money waiting for?
Spring Investments CIO Jackie Ineke struck a more cautious tone: "The question isn't whether new issues are cheap — it's whether the market is stabilizing."
She said she is inclined to buy at lower prices in the coming weeks. This means → some institutional investors believe this is not the bottom and are actively waiting for a better entry point.
This reflects a split among market participants: issuers want to rush deals while the window is still open, while buy-side firms prefer to sit tight and wait for another leg down.
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