Why ASX hybrids are likely to perform strongly

Livewire Exclusive

Livewire Markets

The major banks’ ASX hybrids are expected to perform strongly in the period ahead as their credit spreads compress back to pre-COVID levels and we move past a torrent of recent new supply with no less than five deals having priced on the market.

Ying Yi Ann Cheng, Portfolio Management Director at Coolabah Capital Investments, which manages $4.7 billion in assets, says 5-year major bank hybrid spreads blew-out to around 3.4% above the quarterly bank bill swap rate in November as a flood of new issues from Bendigo, Bank of Queensland, Challenger, Westpac, and NAB came to market.

“Pre-COVID, 5-year major bank hybrid spreads were around 2.6% above the bank bill swap rate. This implies potential capital gains of more than 3.3% if credit spreads mean-revert back to pre-COVID levels.”

The two images below from Coolabah below show major bank hybrid credit spreads over time and relative to major bank senior bond spreads.

Another sector that Cheng says Coolabah likes is the AA rated state government bond market, which is benefiting from the RBA’s quantitative easing (QE) program where the central bank is actively buying these bonds. Coolabah expects the RBA to extend its QE program next year as it seeks to continue to reduce Australia’s jobless rate to below 4% in an effort to boost otherwise anaemic wages growth.

Learn more about Coolabah Capital Investments

Coolabah Capital Investments (CCI) is a leading active fixed income manager, specialising in liquid, high grade credit. Click here for more information about Coolabah's income generating investment strategies.

........
Livewire gives readers access to information and educational content provided by financial services professionals and companies ("Livewire Contributors"). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.

1 contributor mentioned

Livewire Exclusive brings you exclusive content from a wide range of leading fund managers and investment professionals.

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.