Good yield opportunities remain if you know where to look across ASX.
This article reviews key markets for yield-focused investors in 2016 and outlines favoured strategies for 2017.
Cash
The official cash rate started 2016 at 2 per cent and ended at 1.5 per cent with two 0.25 per cent interest rate cuts. The 90-day bank bill rate is currently 1.75 per cent and the 180-day rate is 2.0 per cent, suggesting the market does not expect a further cut in interest rates.
Government bonds
Three-year and 10-year bond rates followed the cash rate down until August.
Both then started rising, further fuelled by the US election result in November increasing the probability of a rise in US interest rates. Bond rates and swap rates are benchmarks against which all fixed-interest securities are priced.
Hybrids
The chart below demonstrates the behaviour of ASX-listed hybrids through the Commonwealth Bank PERLS VII (ASX Code: CBAPD), which was issued on 2 October 2014.
The prices of hybrids are essentially affected by accrued interest (per other interest-bearing securities) and credit spreads. Movements in interest rates have little effect as the rate on these securities is typically reset every 90 days.
The banks have issued large quantities of hybrids and the peak margin for the new issue of a hybrid was 520 basis points (including franking credits) over the bank bill rate by the CBA (PERLS VIII) in March 2016. The chart shows this was around the low for the CBAPD price and that capital gains have been made since.
The margin increase reflected two factors:
1. The market had to establish a margin for a new, and complex, security.
2. Institutions initially shunned these securities, which left the heavy lifting to retail investors. The banks continued with large issuance.
