Time is running out for old-style hybrids
Old-style convertible note ANZPA is set to be called on 15 Dec. Assuming it is called – this is the end for another one of the ever dwindling old-style Tier II securities, which had lower volatility than the new style of hybrids.
With ongoing equity volatility expected by market commentators, advisers looking for a capital-stable fixed-income solution on ASX should consider either Floating Rate XTB or Fixed Rate XTBs.
Why Floating Rate XTBs?
- Quarterly income stream
- Very low price volatility (0.2% to 0.3% over the longer term)
- Interest rate adjusts on a quarterly basis, linked to 3-month BBSW
- Alternative to ‘at-call’ cash with yield pick-up over cash options
Why Fixed Rate XTBs?
- Semi-annual income stream
- Low price volatility (2% to 3% over the longer term)
- Lock in a fixed yield at purchase
- Alternative to TDs with yield pick-up over many TDs
- More capital stable than old style Tier II securities, and much more stable than new style hybrids
Floating Rate XTBs or Fixed Rate XTBs as a rollover option
The decision on whether to select floating rate or fixed rate can be driven by:
- Investor and adviser rate expectations,
- A preference for locking in a total return at maturity with higher yields (fixed-rate), or
- A preference for the very low volatility of floating rate senior securities.
With the market expecting further rate cuts, the trend and feedback from XTB clients is to lock in a yield with fixed-rate XTBs (92% of XTBs traded in July 2016).
ANZPA vs Floating Rate XTB vs Fixed Rate XTB
| ASX CODE | ANZPA | YTMF03 | YTMQF2 |
| Issuer | ANZ | Bank of Queensland | Qantas |
| Seniority | Old-style Tier II | Senior Unsecured | Senior Unsecured |
| Type and Coupon Rate/Yield | Floating (3M BBSW + 3.10%) |
Floating (3M BBSW + 1.00%) |
Fixed YTM: 3.78% Running Yld: 6.36% |
| Call Date/Maturity | 13 DEC 2016 | 12 JUN 2018 | 11 JUN 2021 |
| Volatility | 3.3% p.a. | 0.4% p.a. | 3.8% p.a. |
| Floating Rate Notes¹ | Fixed Rate Bonds² | Hybrids³ | Equities* | |
| Volatility (p.a.) | 0.2% | 2.1% | 2.6% | 16.0% |
| Return (p.a.) | 3.09% | 5.45% | 3.26% | 4.73% |