Best Hybrids now Interest rates are climbing

Hi Geoff,

Hybrids pay a margin over the bank bill rate so interest rates rising would  not necessarily make one hybrid better than another (i.e they are floating rate in nature). Thinking more broadly, if interest rates do go up enough to cause stress on housing then bank hybrids may be less preferred over hybrids from say the insurance companies that can benefit from higher rates, but that is drawing a longer bow.

The key things that dictate hybrid pricing and yields are:

• Credit quality of the issuer – we like the big 4 banks and insurance companies as they are regulated. We have held others like the Crown note for a short time, however we learnt a big lessen 3 or so years ago owning a listed bond that went belly up – never again!
• Structure of the Hybrid. Bank hybrids are now standardised really, there is variance between tier 1 and tier 2 notes not but tier 1 now dominate.
• Duration – how long to run to first call.  The longer the duration, the more than can go wrong and the higher the yield should be.
• Yield to first call which captures the impact of the current price.

Below is an article we published some time ago. If you are interested in Hybrids, and would like a daily rate sheet emailed to you that tracks all these measures, reach out to [email protected] and I will add you on that distribution.

3 current ideas we like with different durations

< 3 years
WBCPI: 1.68yrs; 2.40% margin; 6.14% Yield to Call

3 – 5.5 years
NABPH: 5.07yrs; 2.98% margin; 6.91% Yield to Call

> 5.5 years
NABPI: 7.07yrs; 3.09% margin; 7.12% Yield to Call

Understanding Hybrids