Additional Tier 1 bank bonds are compressing to near-historic tights. The ICE CoCo Index, the benchmark for these instruments, is offering roughly 206 basis points over benchmark rates—well below its historical median of approximately 385 basis points.
This compression suggests investors are not being adequately compensated for the inherent risks: coupon cancellation, extension, and regulatory capital triggers that can wipe principal to zero. Banks are increasingly issuing AT1s with 10-year initial call periods instead of the traditional five-year standard, stretching duration and moving the risk profile closer to perpetual equity-hybrid instruments.
The Credit Suisse AT1 write-down in March 2023 demonstrated the asymmetric payoff. Regulators ordered approximately $17 billion of those bonds to zero as part of the emergency UBS takeover—roughly 10 percent of the global AT1 index at the time. Spreads blew to above 1,000 basis points before the subsequent recovery erased the lesson.
Today's central risk is extension. AT1 bonds are perpetual instruments with optional call dates. Issuers are under no obligation to redeem them at the first call date. If a bank declines to call an AT1 at year five, the coupon resets to the prevailing benchmark plus the original credit spread. An investor who bought expecting a five-year holding period suddenly holds a 10-year or longer instrument at a spread that was priced into a much shorter duration. That duration shift can result in substantial mark-to-market losses if rates move or risk sentiment deteriorates.
Bank fundamentals remain sound. Common Equity Tier 1 ratios across the sector sit well above regulatory minimums, and robust earnings and loan-loss reserves support confidence in debt service. That underlying strength, combined with persistent yield hunger in fixed income, has driven AT1 valuations higher and spreads tighter.
But 206 basis points leaves minimal buffer. A coupon cancellation by any issuer, a spike in market volatility, or a reassessment of bank funding costs could trigger rapid de-rating. The asset class has no middle ground—it either trades in a benign credit regime or it blows up.
