Up to 7.5% pa interest rates on major bank bonds
A torrent of recent bond issues are creating attractive opportunities
In the AFR this weekend, I highlight some unusually attractive interest rates on bank bonds that have emerged in November. Excerpt only:
The silver lining for investors is the availability of attractive interest rates on high-grade bonds, as highlighted by a torrent of new supply this week. Westpac priced a $1.25 billion Aussie dollar Tier 2 bond that paid 7.2 per cent annual interest, which reportedly attracted bids from Australia’s savviest super funds. This deal offered 30-40 basis points in extra annual interest over our fair value estimates.
In the same session, Westpac launched a $US750 million Tier 2 bond, which hedged back to Aussie dollars and paid an annual interest rate of 7.5 per cent. This security provided 70 basis points in extra interest above the Aussie bond curve and was 10-15 basis points cheap compared to our US fair value estimates.
Smart bond issuers like the major banks always pay investors healthy new issue concessions to ensure these securities perform, which is not a practice that is always emulated by smaller rivals in the domestic market.
NAB followed suit with $5.25 billion of three-year and five-year senior bond issues on Thursday that also carried handsome concessions.
We await with bated breath to see where Westpac prices its forthcoming $1.5 billion hybrid issue given a current five-year secondary curve for major bank securities at about 300 basis points over the quarterly bank bill swap rate (or an all-in running yield of 7.4 per cent).
In fixed-income markets right now, it is not hard to earn yields as high as 8.5 per cent from liquid, high-grade bonds that have returned north of 15 per cent over the past 12 months after fees. That makes it very tough for other asset classes until their yields climb to competitive levels above these hurdle rates.
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Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 40 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha Managers” based on his risk-adjusted performance throughout his career across. He previously worked for Goldman Sachs in London and Sydney, the Reserve Bank of Australia, and founded the award‐winning research/investment group, Rismark. He has regularly advised governments, developing unique policy proposals. Chris graduated with the University Medal (Economics & Finance) from Sydney University. He studied in the PhD program at Cambridge University in 2002/03, leaving to set up his funds business.
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Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 40 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...
Expertise
Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 40 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...
Expertise
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