During the GFC, when equity prices fell over an extended period of months, hybrid securities also fared poorly and, in some case, bank-issued hybrids were trading at less than 70% of face value. Prices recovered but the length of time varied considerably. Since then, some commentators have pointed to the correlation of hybrids prices to equity prices and decided hybrids are possibly inappropriate to investors who require assets uncorrelated to equities. YieldReport has discussed the short-term and longer-term linkages in the past but the latest equity market sell-off which ensued in the wake of the UK “Brexit” vote has provided another case study on the behaviour of hybrids and ASX–listed corporate bonds and notes in high-volatility periods.
On Friday 24 June Australian and New Zealand markets were among the first to react to the Brexit voting results. Hybrid securities were sold off along with equities and by the end of the day, hybrids’ trading margins rose. The trading margin is a measure of the yield after a benchmark interest rate (BBSW) is subtracted. Although there were few exceptions in ANZ and Westpac hybrid (see ANZPC, WBCPC, WBCPF), the diagram below is pretty clear; margins rose in a clear majority of hybrids. (21 out of 27 securities, some not shown in the diagram below.)
The response may have been something to do with the fact there were great uncertainties surrounding the unexpected Brexit result and we were heading into a weekend – in particular European, UK and US markets. Often investors in that circumstance will sell first and ask questions later. YieldReport will monitor trading margins over the coming weeks to see what trading margins do in the aftermath of the Brexit vote.