Global financial hybrid capital: Barclays prefers corporate hybrids and insurance T2s as AT1 and bank T2 valuations tighten

Overview

This global hybrid-capital report assesses relative value across European bank, insurance and corporate hybrids, alongside US financial hybrids. Barclays argues that yield support and resilient fundamentals have sustained performance, but tight valuations warrant differentiation: corporate hybrids and insurance T2s offer better forward-looking risk-reward than AT1s and bank T2s.

Core views

The year-to-date macro setting has combined an energy shock linked to the Middle East conflict, higher and more volatile rates, resilient global growth and contained credit spreads. Hybrid capital has outperformed comparable investment-grade senior debt despite this volatility, principally because elevated all-in yields have attracted demand. European AT1s were the strongest segment, delivering 3.2% year-to-date excess returns, versus 2.0% for B-rated credit and 1.3% for BBs. Corporate hybrids returned 0.9% in excess-return terms despite record supply, while bank T2s and insurance T2s returned 0.8% and 0.5%, respectively. Barclays considers this year's performance primarily yield-demand-led rather than the fundamental-driven spread compression seen in 2025. The report's forward-looking cross-credit framework produces a less favorable verdict on the strongest recent performers. It compares one-year expected carry and roll-down against five-year spread beta to euro investment-grade credit, and measures downside P&L if spreads revisit the March US-Iran sell-off wides for positions sized to generate €100,000 of expected return. AT1s offer the lowest compensation for beta risk across European credit and the poorest downside characteristics; bank T2s rank only modestly better. Insurance T2s offer improved beta compensation and the most favorable stress-scenario risk-reward, while corporate hybrids offer the highest return per unit of beta and relatively low downside risk. Barclays therefore generally prefers corporate hybrids, followed by insurance hybrids—principally T2s—over bank hybrid capital. European bank fundamentals remain strong, supported by profitability, resilient asset quality, favorable supply technicals and potentially higher profitability if rates rise. Yet Barclays says AT1 and bank T2 spreads have recovered to new tights, leaving valuation views divided between yield-oriented buyers and spread-focused investors. €AT1 spreads have compressed by about 33bp year-to-date while yields have risen about 77bp as rates moved higher. The absolute €AT1–T2 spread differential is 115bp, near historical lows; on a beta-adjusted basis, €AT1s screen more than 13bp rich to €T2s, at the 70th percentile of five-year observations. The report retains a marginal preference for dollar AT1s over euro AT1s: euro AT1s are only around 14bp rich on a beta-adjusted basis, but their prior FX-hedged yield advantage has largely disappeared. Front-end AT1 and T2 curve positions are favored because the 1s3s area is steeper, offering carry and roll-down with less exposure to rates volatility than longer maturities. Extension risk is a central concern for AT1s. Investors demand little extra compensation for lower reset spreads, keeping extension-risk premia near historical lows even though average reset moneyness has fallen materially. New-issue AT1 reset spreads have compressed to historically low levels and deal dispersion has narrowed sharply. Barclays sees the next three years as relatively benign, but identifies more material extension-risk concerns beyond roughly 2029, where reset economics deteriorate. It raised its 2026 gross AT1 issuance forecast to €40bn from €32bn, as favorable spreads could encourage tenders and opportunistic issuance, despite year-to-date AT1 supply being down 20% year on year. Regulatory changes remain a monitoring item because capital-event clauses and potential liability-management exercises could create differentiated outcomes rather than simply turning existing AT1s into bullets at first call. European insurance fundamentals are described as stable, with resilient earnings, robust solvency and support from higher investment returns. The sector's median solvency ratio was above 220% in the second quarter, and the Solvency II review from 2027 is expected to add mostly 10–20% to solvency levels while lowering capital requirements for securitization investments. Barclays considers private-credit exposure manageable at a sector level: European insurers held €1.185tn of private assets, about 11% of total assets, including €523bn of private credit, about 5% of total assets. Real-estate exposure of €640bn, or 9.2% of non-unit-linked investments, has declined from 10.4% in 2022 but remains a sector to monitor as rates rise. Insurance T2s are favored because they screen cheap both to bank T2s and within their own capital structures, trading around 16bp wide to RT1s on a five-year beta-adjusted basis. Risks include M&A and capital-deployment activity, while higher net T2 supply—€9.5bn year to date—could continue into 2027 due to the Danish-compromise regulatory clarification and refinancing. For European bank single names, Barclays highlights Commerzbank capital instruments, seeing favorable upside skew under either a UniCredit acquisition with a single-point-of-entry resolution strategy or a standalone strategy. It recommends CMZB AT1s and T2s and selling CMZB subordinated CDS; CMZB 6.25% 33c trades at about 6.6% yield to call, compared with about 6.5% for UniCredit 5.8% 35c. Additional relative-value ideas include buying SEB $6.75% 34c, which yields about 7.4% to call and is rated one notch higher than comparable UBS, HSBC and Lloyds AT1s; switching from Belfius €6.125% 31c into Société Générale €6% 31c or Banco Sabadell 6.5% 31c; favoring higher-reset structures against lower-reset alternatives; and buying selected tender candidates with near-term calls. Barclays is cautious on Rabobank due to its €122bn food-and-agriculture lending exposure at 1H26 and related fertilizer, geopolitical and climate risks. The report also uses proprietary AT1 and bank-T2 models to identify bonds trading rich or cheap to fair value. Both are multi-linear cross-sectional z-spread-to-call models that control for tenor, rating, currency, region and bank size. The AT1 model adds reset moneyness—reset spread relative to a theoretical 10-year senior spread—to capture extension-risk pricing; the T2 model instead uses a callable-versus-bullet indicator because regulatory amortization anchors call incentives. Historical testing finds that bonds previously screening wide to the model subsequently tightened, while those screening tight subsequently widened. Barclays ranks opportunities using the current model residual, one-week residual momentum and the residual versus each bond's two-year history. In US hybrids, total year-to-date supply is $94bn, up 2% year on year, but aggregate financial issuance is down 14%. Banking issuance is down 18%, life insurance 51% and property-and-casualty insurance 33%; non-financial issuance has driven the larger total market. Barclays finds financial companies and regional banks most attractive in its sector screens, while insurance ranks least favorably. Regional-bank hybrids offer the strongest relative-value profile, whereas Big 6 banks provide stronger reset protection but weaker hybrid-to-senior pick-up. Financial companies lead on carry efficiency, while insurance combines below-median yield and reset protection with the market's longest duration, at 4.9 years.

Analysis framework

Barclays combines top-down macro and supply-demand analysis with cross-credit comparisons of carry, roll-down, beta-adjusted spreads and stress downside. It then applies issuer fundamentals, capital-structure and regulatory analysis to individual trade ideas, supplemented by quantitative AT1 and bank-T2 pricing models that screen bonds relative to comparable characteristics.

Methodology notes

• Fixed Income and CreditSpread analysis

  Beta-adjusted spread and relative-value analysis

  The report compares hybrid spreads with comparable credit segments and adjusts for historical sensitivity to euro investment-grade spreads to judge whether apparent richness or cheapness is justified.

• Fixed Income and CreditSpread and Asset-Quality Analysis

  Carry-and-roll versus downside-risk framework

  Barclays weighs expected carry and roll-down against spread beta and simulated losses if spreads return to the March US-Iran sell-off wides.

• Quantitative, Factor, and Portfolio TheoryMulti-factor model

  Cross-sectional AT1 and bank T2 z-spread models

  The models estimate fair spreads using characteristics including tenor, rating, currency, region and bank size, with AT1 reset moneyness or T2 callability incorporated where relevant.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Commerzbank capital instruments (CMZB)

  Barclays favors CMZB AT1s and T2s and selling CMZB subordinated CDS, citing upside under either a UniCredit M&A scenario or a stronger standalone strategy.

  Strengths

  Potential tighter spreads if a UniCredit transaction retains a single-point-of-entry resolution strategy; standalone strategy is described as credit positive.

  Comparison

  CMZB 6.25% 33c at c.6.6% YTC versus UniCredit 5.8% 35c at c.6.5% YTC.

  Risks

  M&A defense options could harm the standalone strategy.

• SEB $6.75% 34c

  Recommended AT1 relative-value purchase.

  Strengths

  c.7.4% YTC, one notch higher ratings than UBS, HSBC and Lloyds comparables, and about 60bp spread pick-up versus SEB's 2031 bond.

  Comparison

  Compared with UBS, HSBC and Lloyds AT1s.

• European insurance T2s

  Preferred hybrid segment on relative-value and downside-risk measures.

  Strengths

  Stable fundamentals, high solvency and around 16bp cheapness to RT1s on a five-year beta-adjusted basis.

  Weaknesses

  Higher private-credit and real-estate exposure than banks.

  Comparison

  Screen cheap to bank T2s and to RT1s within insurers' capital structures.

  Risks

  M&A activity, real-estate exposure and higher net issuance.

• US regional-bank hybrids

  Screen more attractive than Big 6 bank and insurance hybrids.

  Strengths

  Strong hybrid-to-senior relative value and favorable composite sector ranking.

  Weaknesses

  Below-median yield makes the case more relative-value-oriented than carry-oriented.

  Comparison

  Rank above Big 6 banks and insurance in the report's sector screens.

  Risks

  Rate volatility and pockets of concern over potential AI disruption.

Key data

• European AT1 year-to-date excess return3.2%Ahead of BBs at 1.3% and Bs at 2.0%.
• €AT1 spread compressionc.33bp YTDOccurred alongside a c.77bp rise in yields as underlying rates increased.
• €AT1 relative value versus € bank T2Over 13bp richOn a five-year beta-adjusted basis, at the 70th percentile of observations.
• AT1 gross issuance forecast€40bnRaised from €32bn due to expected tender usage and opportunistic issuance.
• European insurers' private assets€1.185tnAbout 11% of total assets; private credit was €523bn, or about 5%.
• European insurance sector median solvency ratioAbove 220%Reported for Q2; the 2027 Solvency II review is expected to add mostly 10–20% to solvency levels.
• US hybrid supply$94bn YTDUp 2% year on year, while financial issuance was down 14%.

Impact & implications

Barclays sees elevated yields as continuing to support demand for hybrids, but believes compressed spreads reduce the attractiveness of broad market-beta exposure. Its preferred positioning emphasizes corporate hybrids and insurance T2s, selective dollar AT1 exposure, front-end structures and issuer-specific opportunities where fundamentals, capital structure or regulatory catalysts provide better asymmetry.

Risks

• A renewed risk-off move tied to persistent US-Iran tensions and elevated energy prices could widen credit spreads.
• AT1 extension-risk premia are low despite deteriorating reset economics, especially for longer-dated structures beyond roughly 2029.
• Potential AT1 regulatory reforms, capital-event clauses and liability-management exercises could produce differentiated and adverse bondholder outcomes.
• European banks remain vulnerable to sovereign-related tail risks.
• European insurers' private-credit and real-estate exposures warrant monitoring as interest rates rise.
• M&A and other corporate actions could create event risk for insurance and bank capital instruments.

What to watch

• AT1 regulatory reform proposals and their potential effect on call, capital-event and liability-management outcomes.
• AT1 issuance, tenders and call activity after Barclays raised its gross 2026 issuance forecast to €40bn.
• Whether euro AT1 hedged-yield support remains weak relative to dollar AT1s.
• The Solvency II review due from 2027 and its effects on insurer capital ratios and issuance needs.
• European insurance T2 supply, including effects from the Danish-compromise clarification.
• Developments in potential UniCredit transactions involving Commerzbank or Alpha Bank.