Global bank bonds claw back losses as markets rout ebbs

LONDON/SINGAPORE: An uneasy calm descended across battered bank bonds and shares on Tuesday, with prices recovering a day after regulators sought to convince investors that the hit facing bond holders of embattled Credit Suisse is isolated.

Additional Tier 1 (AT1) bonds issued by European lenders rose with UniCredit’s 6.625% issue up more than 3 cents.

AT1 bonds from others such as Deutsche Bank, UBS and BNP Paribas rose more than 2 cents, data from MarketAxess and Tradeweb showed.

On Monday bank AT1 bonds had taken a beating after news that those issued by Credit Suisse would be written down to zero as part of a rescue merger with UBS.

Banking supervisors in the UK and the euro zone on Monday had tried to stop a market rout by stressing holder of such junior bank debt would only suffer losses after shareholders had been wiped out.

Yet Tuesday's gains in European AT1s only partially offset the hefty losses of 5 cents or more suffered on Monday and sentiment remained fragile.

"Looking forward, the bank debt market is likely to remain fragile as well as vulnerable for news headlines," said Joost Beaumont, head of bank research at ABN AMRO.

AT1s are issued by banks to help them make up the capital buffers which regulators require them to hold. They can be converted into equity but until they are, they do not dilute a lender's share capital.

European banking stocks rose 3.6%, set for their biggest one-day gain since October, while the cost of insuring banks against a debt default fell.

The iTraxx Crossover Europe, which measures the cost of insuring exposure to a basket of European corporate junk debt, eased 15 basis points (bps) to 490 bps from Monday close, S&P Global Market Intelligence data showed.

The iTraxx sub financials index tumbled by 23 bps to 194 bps from Monday's close. The iTraxx senior financials index was down 11 bps to 106 bps.


Invesco's AT1 Capital Bond exchange-traded fund, which tracks the value of AT1 debt, was over 2.5% higher, having fallen sharply on Monday.

S&P Global Ratings in a note said it did not believe the decision to write off Credit Suisse AT1s would lead to material contagion risk for European banks.

Some investors took comfort from the distinction between rules governing AT1 bonds in Switzerland and other jurisdictions.

Thomas Jacquot, head of research at fixed income broker FIIG in Sydney, pointed to how this Credit Suisse AT1 structure was quite different.

"It's a precedent in Switzerland. I suspect most people now are just looking at what else they have in Switzerland, but that's it," Jacquot said.

"You can't apply the Credit Suisse story to any other bank because none of these other instruments have got the same sort of provision and the regulators now have come out globally saying hey, as far as we're concerned, equity is first in line." - Reuters

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bank , bonds , Credit Suisse , S&P Global Ratings


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