NEWS + VIEWS – 28/03/2025
MARKETS
Following a month of falls over concerns about US tariffs creating a trade war and sending the US into recession, share markets rebounded (at least until Wednesday). The US Federal Reserve’s decision to keep interest rates on hold seemed to lift market sentiment and investors were also comforted by Fed Chair Jerome Powell stating that historically, inflation created by tariffs can be transitory. However, the sell-off continued as investors assess the impact of Trump’s latest tariffs.
US ECONOMY OUTLOOK WEAKNESS
The outlook for the US economy weakened for the third straight month in February, dragged down by weakening consumer confidence and uncertain federal policies from the Trump administration. The Conference Board’s Leading Economic Index (LEI), which anticipates turning points in the business cycle by around seven months, declined by -0.3% in February after a -0.2% decline in January.
According to the Board, consumers’ expectations of future business conditions turned more pessimistic, which was the component that weighed down the index the most while manufacturing new orders were the second largest negative contributor. Economic growth in the US is expected to slow to around 2% this year, less than the 2.3% forecast a month ago.
WHERE TO INVEST WHEN BANK HYBRIDS ARE CALLED
Following the Australian Prudential Regulation Authority’s (APRA) confirmation that additional Tier 1 capital (hybrids) will be phased out as eligible bank capital commencing in 2027, Australia’s banks have begun to roll-off their existing hybrids.
While it is possible that the banks could partially replace their upcoming maturities, it is unlikely because most banks will remain above their Tier 1 capital requirements after the repayment of these hybrids and APRA has set a clear timeline based on the run-off profile of the existing hybrids expected to be completed in 2032.
Over the next seven years, $42 billion of capital will be returned to investors, beginning with the redemption of ANZ Capital Notes 5 (AN3PH) on 20 March 2025, CommBank PERLS X (CBAPG) on 15 April 2025 and Westpac Capital Notes 5 (WBCPH) on 22 September 2025 (see chart below).
Source: Bloomberg
For investors looking for a replacement for hybrids, there are some existing and new Exchange Traded Funds (ETF) to choose from.
Betashares Australian Hybrids Active ETF (HBRD)
HBRD will continue to operate with the flexibility to invest in the whole bank capital structure including bank hybrids, Tier 2 securities, senior bonds and cash, as well as corporate bonds and hybrids that are not affected by APRA’s changes.
Betashares Australian Major Bank Hybrids Index ETF (BHYB)
BHYB provides exposure to a portfolio of Australian big four banks’ hybrids. Given the lengthy run-off period, with around 50% of the portfolio due to be called between 2029 and 2032, BHYB will continue to operate as usual.
Beyond these two ETFs, there are traditional investment grade fixed income markets that have previously been the domain of institutions. ETFs now provide access to a broader range of fixed income securities that only exist in the over-the-counter market. Each of these ETFs pay monthly distributions.
Betashares Australian Major Bank Subordinated Debt ETF (BSUB)
BSUB provides exposure to income from subordinated bonds, which rank above bank hybrids in the capital structure. Following APRA’s announcement, Tier 2 issuance will increase as banks seek to replace hybrids to meet regulatory capital requirements.
Betashares Australian Bank Senior Floating Rate Bond ETF (QPON)
QPON offers exposure to income from floating rate bonds issued by Australian banks. Senior floating rate bonds rank at the top of a bank’s capital structure and provide higher yields than traditional bank deposits.
Global X Australian Bank Credit ETF (BANK)
Global X is another leading ETF provider and BANK, an index-based ETF, provides exposure to the full debt capital structure of Australian banks, including senior, subordinated and hybrid securities.
Jonathan Wood
P 0421 028 573
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