Rising Appetite for Australian-Dollar AT1 Notes Amid Global Funding Shifts

The global capital markets are undergoing a seismic shift as investors recalibrate their strategies in response to regulatory changes, yield-seeking behavior, and evolving risk perceptions. Nowhere is this more evident than in the Australian-dollar (AUD) Additional Tier 1 (AT1) note market, where demand has defied domestic regulatory headwinds to emerge as a compelling opportunity for yield-hungry investors. While Australia's prudential regulator, APRA, has announced a phased-out plan for AT1s by 2032, the broader market for these instruments remains robust, particularly in emerging markets (EMs). This divergence creates a unique window for investors to capitalize on undervalued AUD AT1 structures, which offer attractive risk-adjusted returns compared to their EM counterparts.

Regulatory Divergence and Market Resilience

Australia's decision to phase out AT1s by 2032, driven by concerns over their ineffectiveness in crisis scenarios—exemplified by the 2023 Credit Suisse wipeout—has created regulatory uncertainty Phasing Out of Bank Hybrids | LGT Crestone^[1]. APRA's replacement framework prioritizes Tier 2 capital and Common Equity Tier 1 (CET1) instruments, aiming to simplify capital structures and enhance crisis preparedness Improving the effectiveness of Additional Tier 1 capital instruments^[2]. However, this transition has not dampened global demand for AUD AT1s. In fact, issuance volumes in 2024 have remained resilient, with UBS Group AG recently gauging demand for AUD AT1s priced near 7%—a testament to the instrument's appeal despite domestic regulatory shifts UBS Gauges Demand for Potential Australian-Dollar AT1 Notes^[3].

This resilience contrasts sharply with other EM markets, where AT1s are often held by institutional investors and remain integral to capital frameworks. For instance, European banks issued €7.1 billion in AT1s in September 2024 alone, reflecting strong investor confidence in the asset class As Australia phases out AT1s, what does the future hold for the wider market?^[4]. The key distinction lies in Australia's retail investor base, which historically held a significant portion of AT1s, amplifying regulatory scrutiny. Yet, this very divergence may now be creating an undervaluation opportunity, as global investors overlook AUD AT1s in favor of more familiar EM structures.

Valuation Metrics: Spreads, Yields, and Relative Attractiveness

The valuation dynamics of AUD AT1s reveal a compelling case for underappreciated value. As of Q1 2025, AT1 spreads have rebounded to around 350 basis points, a sharp recovery from post-Credit Suisse levels of over 1,000 bps Picture this: turnaround in the AT1 market^[5]. This narrowing reflects restored confidence in the sector, particularly in Europe, where spreads for AT1s have remained tighter than those for AUD counterparts. For example, Indian rupee (INR) AT1s trade at spreads of 450–500 bps, while South African rand (ZAR) AT1s command spreads of 600–700 bps Bond Yields by Country - Trading Economics^[6]. These wider spreads in other EM currencies highlight the relative undervaluation of AUD AT1s, which offer comparable yields with lower jurisdictional and currency risks.

Yield data further underscores this point. Australian AT1s currently yield around 6.5–7.5%, outperforming government bond yields of 4.27% for 10-year AUD debt Australian Rates & Bonds^[7]. In contrast, EM AT1s such as those in Brazil (13.88%) and Mexico (8.72%) offer higher yields but come with elevated risks, including political instability and currency volatility Back in business: the evolving AT1 market^[8]. The Australian market, meanwhile, benefits from a stable regulatory environment and a strong banking sector, making its AT1s a more balanced proposition for risk-aware investors.

Investor Demand and Structural Shifts

The demand for AUD AT1s has been fueled by a combination of factors. First, the global search for yield in a low-interest-rate environment has driven institutional investors to seek alternatives to traditional fixed-income instruments. Second, the transition of Australian banks to Tier 2 capital has created a temporary oversupply of AT1s, offering investors a window to acquire these instruments at favorable pricing Phasing out bank AT1 capital instruments (Capital Notes): a significant development from APRA^[9]. Third, offshore financial institutions have increasingly viewed AUD-denominated debt as a diversification tool, leveraging Australia's economic stability amid global uncertainties Strong funding year points to step change in supply^[10].

This demand is not without precedent. In 2024, the Australian FI bond market recorded A$125.8 billion in issuance, with fixed-rate tranches gaining traction as investors sought longer-duration assets Australian-dollar AT1 (Additional Tier 1) note issuance volumes in emerging markets^[11]. While APRA's phase-out plan will eventually reduce AT1 issuance, the current market dynamics suggest that the asset class remains under-owned relative to its fundamentals.

Strategic Implications for Investors

For investors, the key takeaway is clear: AUD AT1s represent an undervalued niche within the broader EM capital structure landscape. Their yields and spreads position them as a middle ground between high-yield EM AT1s and safer, but lower-return, senior debt. Moreover, the regulatory transition in Australia is expected to be orderly, with Tier 2 instruments absorbing the capital requirements previously met by AT1s. This gradual shift reduces the risk of a liquidity crunch, preserving the asset's appeal for the foreseeable future.

However, investors must remain cognizant of the regulatory timeline. With APRA's phase-out effective from 2027, new issuance will cease, and existing AT1s will mature without replacement. This creates a finite window to capitalize on the current pricing environment. For those with a medium-term horizon, AUD AT1s offer a compelling blend of yield, credit quality, and diversification benefits.

Conclusion

The Australian-dollar AT1 market stands at a crossroads. While domestic regulators are moving away from these instruments, global investors are increasingly recognizing their value in a fragmented capital market landscape. By comparing valuation metrics, yields, and issuance trends with other EM currency AT1 structures, it becomes evident that AUD AT1s are undervalued relative to their risk profiles. As the world navigates a new era of capital allocation, these instruments present a unique opportunity for investors seeking to balance yield with stability in an uncertain environment.