Invesco and WisdomTree’s AT1 products both saw substantial net outflows during the first three quarters of this year despite exceptional year-to-date performance for Additional Tier 1 (AT1) bonds.
The Invesco AT1 Capital Bond UCITS ETF (AT1), Europe’s largest AT1 ETF, experienced net outflows of $290m in the year to end of September, shrinking the product’s assets under management (AUM) beneath the $1bn mark.
The US dollar share class delivered performance of 10.4% in that time, according to Trackinsight data, underscoring the stellar performance of AT1 securities this year.
The WisdomTree AT1 Coco Bond UCITS ETF (COCB), meanwhile, saw over $40m of net outflows during the first three quarters of the year, equivalent to 15% of its assets based on current AUM.
This came despite COCB returning 10.6% in the first nine months of the year.
AT1s, also known as CoCos, are bonds issued by banks that can be converted into equity, contingent on certain conditions, such as the issuer’s capital strength falling below a pre-determined level.
In extreme circumstances they can be written down to zero, just as Credit Suisse’s were in 2023 as part of UBS’s forced rescue of the bank. AT1 ETFs recorded double-digit losses on the day.
AT1s are generally the highest-yielding debt securities issued by banks since holders must be compensated for the risk of write-downs that come with their loss absorbing role in the capital structure.
In 2024, AT1s have been the credit market’s strongest-performing area thanks to attractive yields and tightening spreads, now approaching historical lows.
The narrowing spreads have been driven primarily by the consistent calling at par of AT1 issuers, according to Ayush Babel, associate director, quantitative research at WisdomTree.
“This practice has created a strong "pull to par" effect, encouraging prices to converge towards their face value,” he commented.
Calm returning to the market after the takeover of Credit Suisse as well as no major adverse macro events this year have further supported tighter spreads.
Flows, however, have been deeply negative, with both products losing substantial chunks of their assets to outflows this year.
The issuers put this down to profit-taking and a preference for safe-haven assets, with cash management and short-dated government bond ETFs recording strong inflows this year.
Paul Syms, EMEA ETF head of fixed income and commodities product management at Invesco, said valuations had become “less generous” following the strong performance.
Further, “as central banks embark on a cutting cycle, investors will start to favour increasing interest risk within their portfolios. This may favour allocations to higher duration asset classes such as investment grade credit and government bonds,” he added.
