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Fixed Interest Bonds vs Hybrids

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Our Q&As are emailed in our Saturday Morning Report, find the answer to this question below.

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    Fixed Interest Bonds vs Hybrids

    Hi James , I find your research and views of comfort in making my investment decisions. Often you highlight aspects of a stock I was unaware of. At this stage in the cycle, many retirees like myself are reduciing their Risk exposure to equities and taking positions in Bonds or Hybrids. I would be interested to hear your views on a comparison of Bonds vs Bank Hybrids. Specifically, why bother with Bonds Govt. or Commercial from FIIG, when we have the Four Pillars Bank Hybrids with an attractive margin over the BBSW rate? Particularly if one buys the IPO.

    Answer

    Hi Richard,

    I like the transparency that is available in the Hybrid market over and above bonds which are traded over the counter (OTC), i.e. not exchange traded while the floating rate nature of hybrids over fixed rate bonds has been the way to go in recent years. In short, I have preferred bank hybrids over bonds and our portfolio’s have reflected that stance. Having said that, Hybrids are structured differently to bonds and are higher risk all else being equal. i.e. a CBA hybrid is higher risk than a CBA bond because it sits lower in the capital structure as outlined below. There are also some nuances over conversion and dividend stoppers, however realistically, I see low risk of this if one stays with the well capitalised big 4 banks in Australia.

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    Capital Structure – source XTV
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