How to earn higher returns on ‘trapped’ offshore funds with two Australian banks

Print This Post A A A

With central banks globally looking to keep rates lower for longer, it can be difficult for investors with funds ‘trapped’ overseas by the high exchange rate to find a decent return. Here I’ll show two examples of where you can earn higher comparative returns than you can in Australia from names you’re familiar with.

I often hear clients talk about how they have money ‘trapped’ overseas earning low returns from term deposits in low interest rate environments like the US and the UK. They’d like to bring their money home however the strong Australian dollar makes that difficult, so, as a result, the cash is stuck earning term deposit rates in some case as low as 0.25%. They would like to earn more on their money, but with equity markets remaining volatile and offering low returns in jurisdictions like Europe, they’d like an alternative.

The nature of the bond market, and in particular for the large issuers like financial institutions, is that issuers need to raise funds in several markets, not just their home country. So names that you’re familiar with, and that you may already own, may also offer a fixed income alternative in other jurisdictions and, in many cases, may offer a better comparative return.

NAB Tier 1 hybrids

An example of this is National Australia Bank, which issues a number of Tier 1 hybrids globally. While they have differing maturities, the underlying credit risk across the jurisdictions remains the same. The Australian dollar issue with a 2016 maturity is offering a z-spread* of 279 basis points (bps), the comparable Euro denominated issue, also maturing in 2016, is offering a z-spread of 407bps! That’s an extra 1.28% simply because analysts in Europe don’t know who is National Australia Bank. NAB also has similar offers in US dollars and Pound Sterling. A spread of 407bps is certainly more impressive than the deposit rates on offer in Europe at the moment.

*z-spread is often used to compare issues across different jurisdictions as it takes into account the relevant treasury curve for the particular currency, allowing investors to compare apples with oranges.

The Rabobank Tier 1 issues

This feature isn’t unique to the NAB Tier 1 issue. Another example is Rabobank, which has a number of Tier 1 issues of various maturities. It’s worth nothing that the Australian dollar issue is the shortest maturity, but I feel the extra return on offer in the US dollar and pound issues more than compensates investors.

Again, the US and Pound Sterling issues provide investors with the option to earn strong returns from a very low risk issuer. These spread differentials are unlikely to remain an ongoing feature and we’d expect to see some convergence as global markets settle down. Conveniently, this is likely to coincide with reversion of the Australian dollar exchange rate giving investors the opportunity to earn better returns in the short to medium term while waiting for the opportunity to repatriate funds.

Other offshore hybrids

I’ve chosen to highlight just two issues today, but there are many others: the other Big 4 banks all have offshore issues; energy companies Origin and Santos both have offshore hybrids, which are offering better comparative returns than their Australian equivalents; large international issuers like Swiss Re and AXA have issues offering similar spread differentials.

There’s no need to settle on low returns from your offshore funds. These issues offer strong returns for comparatively low risk issues and should be a prime consideration for investors who either have offshore funds, or access to offshore funds.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Also in the Switzer Super Report:

Also from this edition