Over the next seven years, approximately $40 billion in capital invested in bank hybrid securities will need to find a new home. This follows the Australian Prudential Regulation Authority (APRA)’s decision to phase out major bank hybrids by 2032, reshaping the fixed income landscape for Australian investors—particularly retirees and income-seekers who have long relied on these securities for yield and access.

What’s Changing and Why It Matters

Hybrids, particularly those issued by the major banks, have been a cornerstone of income portfolios. They offer attractive yields, franking credits, and the perceived safety of Australia’s most creditworthy institutions. In fact, retail investors hold an estimated 20–30% of all ASX-listed hybrids.

But APRA’s revised capital framework mandates that banks replace these hybrids with subordinated debt (Tier 2 capital). This change improves capital quality in the banking system but leaves investors seeking like-for-like alternatives.

While 2032 may seem distant, the transition is well underway. In just the next 12 months, over $3.2 billion in hybrid capital will mature or reach call dates:

• Westpac Capital Notes 5 – $1.7bn in September 2025

• NAB Capital Notes 3 – $1.9bn by June 2026

• CommBank PERLS XIII – $1.2bn and others shortly thereafter

With fewer hybrids being issued and maturing capital needing to be redeployed, the question becomes: where should investors turn next?

Subordinated Debt: The Most Natural Hybrid Replacement

Subordinated debt offers many of the features that made hybrids popular—but with some important differences:

• Yields currently range between 5.5%–6.0%

• Income is typically paid monthly, not quarterly

• Issuers are largely the same high-quality Australian banks

• Instruments rank above hybrids and equities in the capital structure, providing better protection in the event of default

Unlike hybrids, subordinated debt does not offer franking credits, which may affect after-tax outcomes. However, in a post-hybrid world, franked income will be increasingly limited to equities, and the yield trade-off may still be worthwhile for many investors.

Moreover, the $120 billion subordinated debt market (globally issued by Australian banks) dwarfs the $40 billion hybrid market, providing greater depth, liquidity, and institutional participation. Investors now also have access to actively managed ETFs such as Macquarie’s MQSD, which offers exposure to these instruments with monthly income distributions.

How Do the Alternatives Stack Up?

Data as at 31 July 2025. Yields are indicative only. Past performance is not a reliable indicator of future returns.

As shown above, subordinated debt provides a middle ground—a reasonable yield premium over senior bonds, lower volatility than equities, and greater capital stability compared to hybrids.

The Case for Active Management in Fixed Income

One key lesson from recent bond market volatility is that not all fixed income is created equal, and passive exposure may not be sufficient. Unlike equities, where index weighting is based on market capitalisation, bond indices weight by debt outstanding—meaning you are lending more to the most indebted issuers.

That is why active management in fixed income is critical. Managers like Macquarie Asset Management have delivered strong excess returns over 1, 3 and 5 years across flagship strategies by actively assessing credit quality, liquidity, and pricing in default risk.

Before allocating to any hybrid replacement, Cadre Capital encourages clients to ask:

• Do I have access to liquidity when I need it?

• What are the risks of default, and how are they priced?

• Is the return commensurate with the underlying risk?

What You Should Do Now

With over $10 billion in hybrid maturities expected over the next year alone, investors can no longer afford to take a “set and forget” approach. Whether you are targeting income for retirement, looking to preserve capital in volatile markets, or seeking diversification, now is the time to review the role hybrids play in your portfolio and explore high-quality alternatives.

We work closely with clients to model after-tax income, assess liquidity needs, and determine the most tax-efficient, risk-adjusted income solutions for the next decade and beyond.

Need Help Navigating the Post-Hybrid Landscape?

Reach out to your Cadre adviser to discuss how the phase-out of bank hybrids may impact your income plan—and explore a tailored, actively managed solution for your needs.