Hybrid margins continue to contract. The average major bank hybrid margin now under 3%. Hybrids are riding the wave that credit markets are strong on central bank support. Strong equity markets also help although bank share prices have retreated from mid-August highs. Reduced bank share dividends continue to help the hybrids find buying support. Equity capital levels has slipped for most hybrids in recent reports, CBA being the strongest.
The scatter diagram shows a sector with some variability in margin at various maturities. Hybrids above the curve offer the best buying especially WBCPG and WBCPI. WBCPE looks expensive and holders should switch to WBCPI for an additional 0.5% yield.
NABPB still gives good short-term yield. Note 90 days prior to NABPB repayment is Sept 15 so still plenty of time to gain the franking credit.
There has been no issuance for quite some time. I think both NAB and WBC will come in the next 2 months. NAB, despite recently issuing an OTC hybrid, still need to replace the large NABPB issue in December and a re-investment offer is the easiest and most efficient pricing methods to do so.
Westpac have two hybrids to rollover in 2021. They have a history of issuing out of cycle and hence with margins now low may come to the market soon. If WBC do issue it may cause some price weakness, hence again the switch out of WBCPW is a good idea. Best to go longer dated to avoid selling of the issuer which tends to be in shorter tern issues. Regarding the regionals, some weak results and with mortgage pressure to come – I would stay away. Extension risk is high.