Within the last few days, AT1 bonds have become a topic of debate inside and outside of the financial world. This is due to UBS and Credit Suisse deal that resulted in them being written down to zero overnight. Such an action has sent shockwaves throughout the global AT1 bond market that is estimated to be valued at $270 Bn before this event as it included $17 Bn of Credit Suisse bonds.
These bonds in simple terms are the riskiest set of bonds that a bank raises capital from but for the investors, a yield of 8-10% makes it too good to look into any risk attached. This was one of the main products that received a lot of investor interest during 2020-21 as the rates in other markets were low due to zero or negative interest rates.
But as all things come to an end so did the low-interest rates and with a speed that caught all of the finance industry off guard. This resulted in a large increase in volatility and uncertainty, especially within the banking system as financial conditions tightened. This increased probability of the risk attached to these bonds coming true.
The writing of these bonds has put the risk premium on such products at a new high. This would make it difficult for banks to raise capital via this product and depend more on equity raising making financial stability even riskier in the next few quarters.