An analysis of the historical trading margins of Westpac’s CPS (ASX code: WBCPC) seems to indicate the presence of investors setting themselves up for Westpac’s latest hybrid issue. Trading margins of hybrids typically fall as a call date approaches and theoretically they should approach a point where the yield on the hybrid is roughly equal to BBSW. At this point, the trading margin is zero.
The trading margins of the Westpac CPS generally followed this path until recent months (although one can see a dip in June/July). Volatility really emerged in October, with large movements both up and down as the result of relatively small price changes.
The first negative trading margins emerged in late November. Redemption of the CPS was expected but still an unknown at this point. Buying Westpac CPS to gain an entry to a new Westpac hybrid was still a tactic with an element of uncertainty at that point but experience in recent years has given investors comfort a replacement security was likely to be issued.
