In the last several years, European banks have been issuing a greater proportion of their AT1 CoCo bonds in EUR
European bank balance sheets are now much more resilient than they were before the Global Financial Crisis
Investors in Europe can now invest in a diversified portfolio of AT1 CoCo bonds without exposure to foreign currency risk
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Additional Tier 1 Coco Bonds could present one of the most compelling opportunities for investors looking for higher yields without resorting to low quality issuers. And with banks now issuing more of their AT1s in EUR, this could be good news for investors in Europe who want diversified exposure to the asset class without the currency risk.
AT1s are a specific type of Contingent Convertible (CoCo) bond issued by banks. They were created after the Global Financial Crisis (GFC) and are intended to act as a capital buffer if the issuing bank experienced severe financial distress. The AT1s would be written down or converted to equity, based on a specific trigger, such as the bank’s Common Equity Tier 1 (CET1) capital ratio falling below a pre-defined trigger level (usually 5.125% or 7%).
In terms of the hierarchy for absorbing losses, AT1s sit just above the bank’s equity and below its senior debt. The credit exposure of an AT1 is driven by this subordination, rather than by the riskiness of the issuer as is the case of traditional high yield bonds. In other words, AT1s may be able to offer similar levels of yield from higher quality issuers.
Example issuer: Banco Santander
|
Rating |
Yield |
|
|---|---|---|---|
USD |
EUR |
||
Senior debt |
A+ |
4.68% |
3.07% |
Subordinated debt |
BBB |
5.16% |
3.25% |
AT1 capital bonds |
BB+ |
6.21% |
5.22% |
Source: Bloomberg, as at 31 December 2025. The mention of securities is for illustrative purposes and is not intended as a recommendation to invest in any particular asset class, security or strategy.
AT1s have demonstrated a low correlation with equities and traditional fixed income, so including them in a portfolio can have diversification benefits. AT1s are normally called by the issuing bank after a set time, most often five years after issuance, with this characteristic giving them low sensitivity to changes in interest rates. This could be appealing to investors who want to increase yield without increasing duration.
Compared to broad high yield, the AT1 market offers different economic exposure, including typically being from higher quality issuers. AT1s are also only issued by banks, whereas the global broad high yield market comprises issuers primarily in industrial sectors (82%), non-banking financial companies and utilities.
European banks now have balance sheets that are much more resilient than they were before the GFC. Much of this is due to regulations, including banks now needing to issue AT1 capital. Banks have also reduced the size of and improved the quality of assets held on their balance sheets, while at the same time have built up the amount of capital held against those assets. In aggregate, European banks have increased their CET1 Capital Ratio from under 6% before the GFC to now almost 15%, considerably higher than the AT1 trigger level of 5.125% or 7%.
Footnote: Global Financial Crisis in 2009.
Source: Bloomberg, as at 31 December 2025
The AT1 market has more than doubled in size in the last 10 years to nearly US$350 billion[i]. In 2015, over 60% of global AT1s in issuance were denominated in US Dollars, more than twice the value denominated in EUR. During the initial few years, banks chose to issue in USD to benefit from the broader investor base in US fixed income.
However, as the AT1 market has matured and issuance has slowed from the rapid pace of the early years, European banks increasingly are choosing to issue AT1s in EUR, being a more natural currency for their regulatory capital. The relative currency weights are more balanced now at 44% in USD versus 37% in EUR.
Source: Bloomberg, Invesco, as at 31 December 2025, based on the Bloomberg Global Contingent Capital Index.
It’s easy to see why if makes sense for European banks to issue debt in the currency that aligns with their own regulatory capital. But EUR-denominated debt could also make more sense for European investors, particularly those who don’t want currency risk.
Investing in EUR-denominated assets removes currency risk and the costs involved with hedging out of a foreign currency. This might be particularly appealing for investors wanting to diversify away from USD assets if they are worried about the impact of a potentially weaker Dollar.
Invesco is a market leader in differentiated fixed income exposures, including the broadest range of funds targeting hybrid securities. This includes the largest AT1 ETF in Europe – a $1.7 billion fund launched in 2018 that focuses on the USD AT1 segment.
We have now expanded this offering by launching the first ETF in Europe that specifically targets the EUR-denominated segment of the AT1 CoCo bond market. Find out more about the Invesco EUR AT1 CoCo Bond UCITS ETF below.
An investment in this fund is an acquisition of units in a passively managed, index-tracking fund rather than in the underlying assets owned by the fund.
Marketing communication. For professional investors only. Capital at risk. European ETFs saw strong momentum in 2025, with US$98bn in Q4 flows pushing full-year net new assets to a record US$373bn. Find out how ETF investors are positioning their portfolios and the latest trends in the European ETF market.
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