After covered bonds and deposits, the next safest major bank investment is a “senior-ranking” but unsecured bond, rated “AA-”. Today this pays a return of about 4.3 per cent, which is also better than the average deposit.
Like covered bonds, these senior bonds are not easy to access as they are traded in the wholesale market and require minimum investments of $500,000. Two ways to tap into them are through a managed fund that focuses on fixed income, or via a broker like FIIG, which breaks bonds up into smaller chunks.
In the past year, Westpac, ANZ Banking Group and National Australia Bank have listed on the ASX $4 billion worth of “subordinated bonds”, which rank behind senior creditors but ahead of everyone else. These are not to be confused with hybrids, which give banks the option of not paying you dividends, have ultra-long if not perpetual terms, and convert into equity under adverse scenarios. The new ASX subordinated bonds have fixed maturities and legally binding payment obligations. They currently offer interest rates around 6 per cent.
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