The Further Demise of ‘Supersub’ Bank Bonds

As our regular readers will know, we have been tracking Tier 1 (T1) capital’s fall from grace since last August. Unfortunately for these bank bond holders, the picture has not improved this week, with S&P and Fitch widening the notching between senior and hybrid debt on a number of European banks. This is because in their view (which has also been the long held view of our analysts) the risk/reward characteristics of these securities are becoming more akin to those of equity than debt.  It feels as though the wider market is coming round to our way of thinking. This is significant because any further credit rating downgrades on T1 bank bonds will cause these bonds to drop out of investment grade indices, leading to more investors becoming forced sellers, and driving prices even lower.

Sterling corporate bond returnsHere is an update of the chart Richard used in his October 3rd blog. It shows that T1 has fallen even further since Deutsche Bank’s decision not to call a Lower Tier 2 bond in December; the average T1 bank bond is now down over 32% since July ’07. If more banks’ T1/UT2 ratings are cut things could get even gloomier.

If you would like more information on hybrid debt, or Deutsche not calling its LT2 bond, it is worth taking a look at last month’s blogs by Mike here and from Jim here.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Discuss Article

  1. Joel Barrett says:


    I have heard many varied opinions regarding the direction of GILT's over the coming year, please can I get your professional thoughts on asset?

    Posted on: 19/01/09 | 12:00 am
  2. Anonymous says:

    How would you rate the risk of fixed bonds such as those offered by Anglo-Irish bank? Is this bank British or Irish?

    Posted on: 19/01/09 | 12:00 am
  3. Matthew Russell says:


    10 year gilt yields are now 3.5%, which is a bit higher than at the beginning of January (when they very briefly dipped below 3%, a record low).  But the fact that gilt yields are close to a record low doesn't mean we're in a government bond bubble.  We believe we'll experience deflation from the middle of this year, and if inflation is negative then gilt yields certainly should be low (see Mike's blog here to see what happened in Japan.

    The negative for gilts, though, is that there's obviously going to be a lot of the stuff issued over the next year or two, and this technical headwind means that we're now broadly neutral on gilts, having been very bullish through 2008. 

    Posted on: 22/01/09 | 12:00 am
  4. Matthew Russell says:

    Unfortunately we can not comment on individual bonds, but if you want to find out more about Anglo-Irish bank then there's a writeup on Wikipedia here

    Posted on: 27/01/09 | 12:00 am

Leave a comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.