The chase for yield continues. The Australian 10 year bond rate is trading at 1.73%, with the 3 year bond at 1.36%. This chase for yield has seen the new IPO hybrid issues debut strongly. Macquarie’s 2026 hybrid traded at a 2.5% premium this morning, pushing the issued yield of 6.15% down to around 5.70%. Last week’s NAB 2026 hybrid is currently trading at a 1.5% premium to the issue price, again pushing the yield down to 5.60%.
The five and six year Hybrids are trading in the 5.40% to 5.50% range. With the longer maturities offering less of a premium, a continued rally may be unlikely.
With the possible loss of franking credits if the Labor Government gets elected, a trend is likely to emerge where investment products will be created in the fixed interest market that will be a pure cash return with no franking credits attached. To this end, Perpetual Investment is launching a high yield fixed interest listed fund, looking for up to $440m.
From BondAdviser.com: The Perpetual Credit Income Trust (PCIT) (the Trust) is a listed income trust (LIT) designed to provide investors with access and exposure to credit markets with a tilt towards both the private debt markets and high-yield bond markets. This is overseen via an active management mandate overlay, that prioritizes capital retention, from an established fixed income team (the Manager) (the Team) that manages over $7 billion. PCIT offers a unique investment opportunity to a typically inaccessible market in Australia for retail investors; over-the-counter bonds require wholesale accreditation and corporate loans typically require a minimum investment of $5 million. Specialist experience and knowledge are paramount to successful operations in a niche market ($8bn in high yield issuance in Australia in 2018) and Perpetual’s team comprises skilled and experienced professionals with a proven track record. The Team is supported by Perpetual Investment’s broader network of investment professionals that together manage $27.7 billion of assets as at December 2018.
The target return of the Trust is floating based on the Reserve Bank of Australia (RBA) Cash Rate plus [3.25]% p.a. net of fees (pro-forma net target return [4.75]% p.a.). The Trust is designed to deliver monthly cash distributions combined with low volatility and avoiding capital downside (first distribution expected following the period ending 30 June 2019). All foreign currency risk is typically hedged into AUD. Outright borrowing is not anticipated and not allowed for gearing purposes; however, leverage is permitted as resultant from derivative positions, which is used to take advantage of market opportunities or hedge currency risk, interest rate risk and credit risk. The maximum leverage limit on uncovered derivative positions is [15]% of the Trust’s net asset value (NAV).
If you are interested in participating in the IPO, please let us know and we can provide you a research note and access to the Disclosure documents.