What are AT1 bonds?

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So AT1’s, they are subordinated bank risk. So you have a bank and a bank has a large capital structure with, you know, dozens if not, you know, hundreds of bonds you know, going from kind of senior and secure to tier two and then and all the way down to the most subordinated level, which is the AT1 bond.

So look, we just view it as kind of unsecured subordinated bank risk, but it’s a high quality sector, right? Because the bank banking sector in Europe is high quality. You look at the AT1 index, for example, it’s giving you average yields of BB plus. So just below investment grade, that’s at the subordinated level. 95% of our AT1 buckets is investment grade at the senior uncured level.

So these entities are almost exclusively investment grade issuing subordinated bonds at an average rating of BB+. And we are seeing still yields of, you know, 8.5%, so high single digit yields for a sector that is performing really better than it has at any point in the last 15 years, right? That this rate environment is a good thing for financials. You know, steeper yield curves, they, you know, borrow short and long allows them to generate better profitability. So we are seeing now return on equity in the banking space of 11-12% versus the kind of 4% or 5% we saw during the QE era. So we’ve seen much better equity returns. We’ve seen much stronger credit upgrades to credit downgrades. In fact, Western European financials was, I think, the strongest upgrade to downgrade sector of global fixed income last year, and still highly attractive yields.