After a Three-Week Standstill, AT1 Bond Market Welcomes a "Breakthrough Moment"! HSBC(HSBC.US) Fires the Opening Shot with $1 Billion Issuance

Bloomberg News has learned that HSBC Holdings (HSBC.US) is issuing its first batch of additional Tier 1 (AT1) bonds denominated in major currencies since the Middle East conflict erupted in late February, reopening a niche in this high-risk credit market. According to sources, the bank plans to raise at least $1 billion through two perpetual bonds, which can be redeemed for the first time after 5.5 and 10 years, respectively. The initial market pricing yields are approximately 7.25% and 7.5%.

In recent weeks, the issuance of new AT1 bonds has nearly come to a halt due to concerns over the Middle East war and banks’ exposure to private credit. While issuance was strong earlier this year, the last deal occurred just before the conflict broke out in late February.

Although AT1 bonds are typically more volatile during turbulent times due to their risk profile, they have not experienced the most severe sell-off seen in credit markets. Investors are holding onto these bonds, worried that they may not be able to buy them back at acceptable prices once the market stabilizes.

Historically, during periods of severe market stress, AT1 bonds tend to be sold off by fund managers. But this time is different — this $280 billion asset class has gained popularity in recent years, with its high yields attracting many new buyers.

Richard Hodges, fund manager of Nomura Asset Management’s Global Dynamic Bond Fund, said, “If you sell your AT1 bonds, you might never be able to buy them back.” He holds AT1 bonds with higher reset spreads, which tend to be in higher demand and less volatile. Fatima Lewis, senior portfolio manager at Mirabaud Asset Management, also said she owns AT1 bonds. She explained that this is partly because trading based on headlines related to Trump is difficult, and she is quite comfortable with long-term credit risk, while bid-ask spreads make it hard to re-enter at reasonable prices.

Overall, this suggests that the selling pressure on AT1 bonds since the Middle East conflict began has been relatively contained. Data compiled shows that since the start of the war, bank-issued perpetual bonds have almost not appeared among the most actively traded 1,000 bonds in the U.S. dollar market.

Investors are reluctant to sell AT1 bonds because these bonds have become one of the hottest areas in the credit market in recent years. They have delivered double-digit returns over the past two years — a notable shift since the $17 billion+ AT1 bonds of Credit Suisse were written down in 2023.

While the conflict has indeed impacted returns — with a multi-currency AT1 index hedged to USD falling 1.6% this month — its performance still outperforms the global investment-grade bond index, with total returns far lower than the levels seen when Trump announced global tariffs in April last year.

In the current environment of reduced AT1 issuance, the market is supported by a scarcity of supply. Data shows that the last major currency-denominated AT1 bond issuance came from Qatar’s Commercial Bank PSQC just before the outbreak of the Middle East war. The previous issuance by a European bank was nearly a month ago.

For funds seeking high yields, AT1 bonds are attractive. Their yields are far higher than those of high-grade bonds, partly because they skip coupon payments and carry the risk of potential default, making them closer to junk bonds. But for investors, these risks are worth taking — especially since AT1 bonds are issued by the world’s largest and most capitalized banks, which have a lower likelihood of default.