Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 61

What is the outlook for bank hybrid yields?

The bank hybrid party rolls on, although not in the heady issuing volumes of 2012. Regardless of the added risk of investing down the capital structure, retail investors facing term deposits of 3% cannot resist hybrids paying 5.7% issued by Australian banks. This week, it was Westpac’s turn to announce a new deal. Despite the equity-like characteristics of no fixed maturity date, no security, subordination, convertible to shares and non-cumulative payments (missed distributions are not recovered), the book build at 3.05% to 3.2% over the Bank Bill Rate (adjusted for franking) will drag in as much as Westpac wants. It is, after all, Westpac, and investors love the major banks.

It is a beautiful meeting of demand from retail investors for yield and the desire to raise cheap capital by banks, encouraged by a regulator who wants risk reduced in the banking system, and distribution agents who collect millions of dollars in fees. The only losers will be the investors if we have GFC-like conditions again, and even then, nobody who has held Australian bank paper to maturity has lost money. So the party music keeps playing and everyone is joining the dance.

Although issuing volumes are down from levels of recent years, the margin is holding at a little above the 3% level. Morningstar’s April 2014 Monthly Review of Australian Debt and Hybrids shows the fall in the Bank Bill Rate against which the returns are set. The current 90 day Bank Bill Rate is about 2.7%.

The Morningstar Review also looks at the futures market and implied rates until the end of 2015. No material increase in returns from hybrids can be expected soon.

Looking further along the yield curve using long term interest rate swaps to 15 years, there’s little cause for celebration for investors relying on debt securities to live on. The current long rates are fluctuating around 4.5%.

In the absence of a ‘black swan’ event that pushes up rates unexpectedly, the search for yield will continue, and with it, support for bank hybrids and buying of solid dividend-paying shares including the banks.

 

  •   9 May 2014
  • 1
  •      
  •   

RELATED ARTICLES

Calculation and use of BBSW and BBSY

banner

Most viewed in recent weeks

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Latest Updates

Retirement

The retirement scorecard: how many of these questions can you answer?

From the maths of retirement, estimating spending and picking the right asset allocation to survive a poor decade, here are the questions every retiree – current or future – should be able to answer for themselves.

2026 is not 1999

The US market looks eerily similar to the dot-com era with soaring AI spending and tech giants dominating returns. But one difference separates today’s boom from the dot-com bubble and it could determine what happens next.

Planning

Taxing time for trusts

Trusts are facing a shake-up, but an overhaul may not be necessary. Families can explore restructuring strategies that preserve succession and the asset protection benefits that have made these structures valuable.

Economy

Why the US economy is stronger than you might think

War, inflation and higher rates were expected to derail America. But has the market got it wrong? Three forces are driving the economy beyond expectations, revealing implications for stock prices and portfolio positioning.

Gold

How much trust is in your portfolio?

Everyone talks about diversifying assets. Far fewer think about diversifying trust. As inflation, debt and market assumptions collide, the question is whether portfolios need greater protection from unexpected outcomes.

Retirement

Retirement in reality - 7 months in

Seven months into retirement, I'm still uncovering surprises. This month was spent reflecting on the slow pace of health change, the myth of neatly scheduled part-time work and the unexpected persistence of retirement guilt.

The new geography of technology leadership

The next chapter of technology may not belong to the companies or business models many expect. As the landscape shifts, some opportunities are emerging in places that remain surprisingly overlooked by global markets.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.