AT1 bonds are trading with historically high yields and coupons, giving some investors the impression of both attractive carry and certainty of calls in the future. However, an important metric that we believe has often been overlooked during this period is the reset spread. The reset spread is the additional yield added to a market rate to determine the coupon the bank will pay if it skips its first call option. While overall yields remain historically high, large orders for new AT1s have allowed banks to offer some of the tightest spreads in their issuance history, which increases the risk of extension in the future.
Banks are incentivized in many ways to call their AT1 bonds, but if the reset spread is lower than the yield they would pay by issuing a new AT1, the reduced economic incentives for the bank increase the extension risk of the bonds.
