New sell-off in banking shares amid AT1 bond fears as investors hide in gold and defensives

“Everything is moving so quickly in the banking sector that as soon as you think the main issue is sorted, along comes another worry. The takeover of Credit Suisse by UBS was done fast and should have provided reassurance to the market that we haven’t had another bank collapse. However, what it has done is exposed the issues around AT1 bonds, also known as additional tier-one bonds,” says Russ Mould, Investment Director at AJ Bell.

“AT1 bonds are a form of contingent convertibles. They can be converted into equity or written down entirely if certain conditions are met, with the decision triggered by capital strength falling below a pre-determined level – i.e., when the issuer gets into trouble. These bonds typically offer high yields to reflect the additional risks.

“The Swiss financial regulator has ordered that Credit Suisse’s AT1 bonds be written down to zero. That appears to have spooked investors and has led to a sell-off in other bank debt and that’s weighed on share prices.

“It means the banking crisis we’ve seen over the past few weeks has started a new chapter rather than reaching its ending.

“Spare a thought to investors holding exchange-traded fund Invesco AT1 Capital Bond ETF, whose share price slumped nearly 16%. It tracks the performance of an index of AT1 bonds including some issued by Credit Agricole, Barclays, Lloyds and UBS.

“The FTSE fell 1.4%, in line with other major European indices, with the top fallers dominated by banks and insurance companies.

“The 3.1% slump in the Brent Crude oil price also suggests that investors are nervous about the economic outlook. If banks face tighter regulation and pressure to further improve their capital ratios, it could suggest that many consumers and businesses will find it harder to borrow money and that could feed into weaker economic activity.

“So far March has been like a ghost train for investors. Every time they turn a different corner, some new horror screams in their face. Many investors now want to get off the train and that’s evident by them hiding in classic areas deemed to be market safe havens.

“We’re talking gold miners, utilities, consumers goods and even rat catchers, pockets of the market that offer some reassurance when everything else seems terrible. That’s why Endeavour Mining, Severn Trent, Unilever and Rentokil were in demand at the start of the week.”

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