Riskier bank bonds roar back as returns rise, AT1 market reopens

Riskier bonds issued by banks are recovering further from the turmoil caused by US regional lenders and Credit Suisse Group AG’s crisis, offering some of the best gains in debt markets and as demand returns for new deals.

Prices of such capital securities, including the riskiest Additional Tier 1 notes, climbed on Tuesday to their highest since Silicon Valley Bank’s collapse on March 10, a Bloomberg index shows. The notes have returned 12% since Credit Suisse’s rescue later that month triggered a $17 billion writedown of its AT1 debt.

Meantime, two European banks on Tuesday sold the first publicly-syndicated AT1 bonds on the continent since the Swiss lender’s crisis.

The developments are the latest signs of easing concerns about the health of the global banking sector, as hopes grow that major central banks are nearing the end of their tightening cycles. The reopening of the AT1 issuance market in Europe is particularly encouraging, as it followed a series of new offerings in Japan where demand partly benefited from entrenched expectations for low interest rates.

Morgan Stanley strategists included European banks’ AT1 bonds as one of their top trades in their mid-year outlook, citing “strong profitability and robust balance sheets” for the region’s lenders. In Asia, they liked Japanese banks’ total loss-absorbing capacity debt, a less risky category than AT1s.

Compared to the bank debt’s strong performance, a broad gauge of global bonds including investment-grade and junk notes has lost 0.95% since the banking turmoil in March, a Bloomberg index shows.