CoCo Bonds Show Resilience Amid Market Volatility Triggered by Trump’s “Liberation Day”
19 MAY, 2025
By Romain Miginiac, Head of Research for Credit Opportunities strategies at GAM
April was a highly volatile month following President Trump’s announcement of “Liberation Day”. Global equity markets, government bonds and currencies were all significantly affected by these developments. Initially, equity markets reacted very negatively and, excluding periods influenced by Covid, we saw a spike in the VIX index – the so-called fear gauge – to its highest levels in the past 10 years. However, the situation began to reverse after the announcement of a 90-day suspension. One sector that remained relatively immune to this volatility was corporate bonds. While spreads widened at the beginning of the month, on a relative basis this move was significantly smaller compared to other asset classes. For instance, credit spreads on contingent convertible bonds (CoCos) Additional Tier 1 (AT1) widened from 313 basis points (bps) to 420 bps on 9 April, before ending the month at 360 bps – a level still close to historical lows.
Valuations and fundamentals
Credit spreads have widened, but the correction was orderly and short-lived, as the Trump administrationannounced a 90-day pause on the introduction of most new tariffs. This short correction gave us the opportunity to add small quantities of AT1 CoCos at very attractive yields, ranging between 8% and 9%.
We believe that despite the pause and rebound, volatility is likely to remain high, particularly as there is a risk that macroeconomic data may start to deteriorate. Therefore, we believe a degree of caution is still warranted.
Extension risk – which considers the proportion of perpetual or callable AT1 CoCos – increased over the month and currently stands at around 35–40%. This also supported our slight increase in exposure to AT1 CoCos. When market conditions are unfavourable, this figure tends to approach 100%, while in very favourable conditions it drops close to 0%, indicating that valuations are at their lowest. From a risk/reward perspective, we therefore see a mild incentive to increase exposure to AT1 CoCos, although Tier 2 and senior financial bonds continue to offer greater value, albeit less than a month ago.
First-quarter results have now been released and remain extremely strong, with earnings generally beating consensus expectations and credit metrics remaining robust. For example, Barclays reported very strong results, with a return on tangible equity (ROTE) of 14% versus an expected 11%, while its Common Equity Tier 1 (CET1) ratio rose by 30 basis points.
