What are AT1 bonds, and how do they work?

Additional Tier 1 bonds, or AT1s for short, are part of a family of bank capital securities known as Contingent Convertibles or ‘Cocos’. They are bonds issued by banks that contribute to the total level of capital they are required to hold by regulators.

AT1 yields can vary significantly depending on a number of factors, including the size, geography and perceived quality of the bank, as well as the structure of the AT1 bond itself, but they can often offer a premium over all other forms of bank debt and corporate bonds with a similar rating.

Consequently AT1s have become a mainstream market for institutional investors and are being increasingly included in fixed income portfolios around the globe.