A: Theoretically, a change in interest rates shouldn’t have any impact on the price of hybrid securities, as the interest rate is effectively being re-priced every 90 days. While the margin is fixed, it floats over the 90 day bank bill rate.

Of course, investing in bank hybrids is in some cases, an alternate to investing in bank ordinary shares. If interest rates fall, and bank ordinary share prices rise because of their yield, then hybrid security prices might also rise. So, there is a “relative yield” position which needs to be monitored. In the long term, a fall in interest rates should lead to a rise in bank ordinary shares that should lead to a rise in bank hybrid security prices.

At the moment, the hybrid securities market is suffering from indigestion, and a little bit of an ongoing concern that the Murray Inquiry might ultimately lead to more supply down the track. The recently issued CPAPD, which was issued at a fixed margin of 2.80%, is now trading around $95.80 – an effective margin of 3.48%.