CCBO LN
WisdomTree AT1 CoCo Bond UCITS ETF - USD
Why CoCos remain attractive in a tariff-heavy environment
Published 8 May 2025
Ayush Babel
Director, Quantitative Research
Prof. Wim Schoutens
Professeur à l’Université de Louvain, en Belgique
Key Takeaways
- AT1 CoCo bonds offer attractive yields amid uncertainty: with spreads nearing 400 basis points and yields above historical averages, Contingent Convertible (CoCo) bonds present an opportunity for income-seeking investors in a volatile economic environment
- Banking sector fundamentals are exceptionally strong: banks are currently well-capitalised with record-high CET1 ratios and historically low non-performing loan levels, providing a robust buffer against potential economic shocks
- Banks are less vulnerable to tariff risks: due to their indirect exposure to trade and strong regulatory oversight—including stress testing and country-specific capital requirements—banks are structurally more resilient than sectors directly affected by tariffs
- Related Products WisdomTree AT1 CoCo Bond UCITS ETF - USD, WisdomTree AT1 CoCo Bond UCITS ETF - USD Acc, WisdomTree AT1 CoCo Bond UCITS ETF - EUR Hedged, WisdomTree AT1 CoCo Bond UCITS ETF - GBP Hedged, WisdomTree AT1 CoCo Bond UCITS ETF - USD Hedged, WisdomTree AT1 CoCo Bond UCITS ETF - EUR Hedged Acc Find out more
In today's uncertain economic landscape, where tariff concerns dominate headlines and market volatility has spiked again, investors are rightfully seeking resilient investment opportunities. Additional Tier 1 (AT1) Contingent Convertible bonds (CoCos) from the banking sector present a case for consideration, particularly given the widening spreads now close to 385 basis points as of 28 April 20251.
The banking sector currently stands at its strongest position in decades. Financial institutions now maintain record-high Common Equity Tier 1 (CET1) capital levels, creating substantial buffers against potential economic shocks as can be seen in Figure 2. Simultaneously, Non-Performing Loan (NPL) ratios remain at historic lows, indicating healthy loan books and limited credit risk exposure. This combination positions banks substantially better than during previous economic crises, establishing a foundation of stability that cannot be overlooked.
Figure 1: Top 10 AT1 CoCo issuers CET1 ratios and AT1 CoCo Issuers CET1 buffer to max. trigger breakdown
Unlike manufacturing, agriculture, or consumer goods sectors, banks face relatively less direct impact from rising tariffs. While these protectionist measures immediately affect companies engaged in cross-border trade, banking institutions remain one step removed from these pressures. Any effects on banks would materialise indirectly and later in the economic cycle, primarily through potential pressure on client companies or individuals if unemployment rises significantly. This built-in delay provides banks with valuable adaptation time that directly affected industries simply don't have.
Perhaps most reassuring for investors is the rigorous regulatory framework governing the banking sector. Financial institutions undergo regular stress tests calibrated to economic scenarios far more severe than any predicted tariff fallout. These assessments deliberately test banks against extreme conditions, including sharp economic contractions, severe unemployment spikes, and dramatic asset price declines. The fact that banks consistently pass these tests demonstrates resilience far beyond what would be needed to weather tariff-related economic turbulence.
The regulatory requirement for banks to be independently financed and regulated in each operating country further mitigates cross-border contagion risks. Unlike multinational corporations that may face direct impacts across their global supply chains, each banking entity maintains its own capital base and regulatory compliance. This compartmentalisation provides natural protection against the spread of localised economic challenges that might arise from targeted tariff measures.
With CoCo spreads currently close to 400 basis points, and yield above historical mean (Figure 2), these instruments offer notable value given the sector's fundamental strength. For yield-seeking investors navigating an uncertain economic environment, bank CoCos present an opportunity to access returns backed by a sector that is well-positioned to withstand economic pressures that may emerge from ongoing tariff discussions.
Figure 2: Historical yield on AT1 CoCos
1Source: WisdomTree, Markit. Data as of 28 April 2025.
Related Products
About the contributors
Ayush Babel
Director, Quantitative Research
Ayush Babel is the Director of Quantitative Research in WisdomTree's multi-asset quantitative research and index teams. In this role, he focuses on developing innovative quantitative strategies across various asset classes while supporting WisdomTree's diverse range of products. His expertise spans factor exploration, portfolio construction and optimization, quantitative investment research, and product development.
With over a decade of experience in the financial services industry, Ayush has held investment research roles at J.P. Morgan and Franklin Templeton. At these institutions, he was responsible for developing and managing equity and fixed income smart beta products, as well as cross-asset risk premia solutions for global institutional and retail clients. His experience covers a broad spectrum of asset classes and investment styles.
Ayush holds a bachelor's in Engineering Physics and a master’s degree in Nanoscience from the Indian Institute of Technology, Bombay.
Prof. Wim Schoutens
Professeur à l’Université de Louvain, en Belgique
Wim Schoutens is a professor at the University of Leuven, Belgium. He has extensive experience of quantitative finance and risk-management and is highly regarded for his consulting work to the banking industry and national and supra-national institutions. Wim is an independent expert adviser to the European Commission, has worked for the IMF and is the author of several books on quantitative finance and contingent convertible bonds (CoCos). He is also the editor of several academic journals and editor in chief of both the ‘Review of Derivatives Research' and 'Frontiers of Mathematical Finance'.