Risky Bank Debt Is Rationally Exuberant
The market for risky bank debt has taken off since the demise of Credit Suisse shocked it.
Photographer: Fairfax Media/Fairfax MediaWhat’s the canary in the overpriced-asset coal mine? One obvious tweety bird is the riskiest type of bank debt, known as perpetual additional tier one bonds. These securities allow regulators to wipe out investors if a bank fails, but to compensate they offer the highest yields for lending to financial firms. This specialized asset class’s credit spreads are tightening despite a surge in issuance. But it’s not the red flag you might at first think.
I have argued previously that worsening government finances are propelling allocation out of theoretically risk-free sovereigns into corporate and financial debt. Yields in certain markets, particularly in the UK or US, are high because nations are borrowing so much.