The higher the return, the higher the risk of loss - this also applies to AT1.
In my view it is crucial that investors are being compensated for the underlying risks. Given the historically high yields combined with solid fundamentals in terms of issuer profitability and solvency, AT1 bonds currently offer a good risk compensation.
What about the secondary market?
Secondary market liquidity has also been good with total trading volumes year-to-date actually 35% higher than for the same period last year. Contrary to popular belief, the secondary market has remained rather liquid even during difficult phases with many active trading partners.
How has issuance developed in recent months? And are there any geographical anomalies in terms of issuers?
Somewhat unusually, we have seen more new AT1 issuance in EUR than in USD. The AT1 market is skewed towards USD, with USD AT1s representing 60% of the market and EUR AT1s only 30%. However, since new issuance started in June, 60% of issuance has been in EUR with a total issuance volume of EUR 3.5bn. Only 40% of issuance has been in USD, with total issuance of USD 2.5bn. In contrast, we have seen very limited activity in GBP and CHF.
The main argument for buying shares in a Coco fund rather than investing in a single AT1 bond is diversification - what else?
Diversification is even more beneficial for smaller investors as the minimum denomination of AT1 bonds is the Swiss franc equivalent of around CHF 200,000 compared to a Coco fund with a minimum of CHF 10,000. Investing in a CoCo fund is also advantageous from a currency hedging perspective if a fund offers currency-hedged share classes in the desired currency. Importantly, by investing in a CoCo fund, the investor outsources all the work involved in monitoring regulatory developments, analysing and selecting individual banks and individual AT1 bonds, which can have a tangible impact on investment performance, as the alpha opportunity in the AT1 bond market has historically been significant.