HYBRIDS
If interest rates fell what would the effect be on the share prices of MQGPD and CBAPM
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Answer
Hi John,
Generally none. What impacts the prices of Hybrids is the perception/pricing of risk, which is shown through the spread over the bank bill rate. Unlike a fixed rate bond, whereby the price goes down when interest rates go up and vice versa when rates go down, hybrids are floating in nature. At a pinch, Hybrids actually look relatively better when rates are very low. For example, when the bank bill rate is at 1% and the spread is 3%, there is a 400% uplift on the hybrid return versus holding bank bills. However, if the bank bill rate is 3% and the margin is 3%, there is only a 100% uplift.
Hope that makes sense, however the key message with floating rate notes is that changes in cash rates will not have a huge bearing given their floating rate nature, unlike bonds with a fixed rate of return where interest rates will have a big bearing.
