Matthew Macreadie

As the Australian Prudential Regulation Authority (APRA) plans to phase out Australia’s $43 billion hybrids market over the next seven years, investment-grade credit and corporate bonds provide an attractive and stable income stream, according to Matthew Macreadie, executive director of credit strategy and portfolio management at Income Asset Management (IAM).

“With hybrids gradually disappearing from the market, investors who rely on them for income certainty must adapt, and increasingly they are seeking reliable alternatives,” Mr Macreadie says.

“Corporate bonds, particularly investment-grade credit, offer an excellent alternative, offering yields between 6 per cent to 7 per cent per annum, ensuring continued access to predictable returns while maintaining a strong credit profile.

“As hybrids are phased out, there’s a clear gap for income investors seeking simpler and more effective forms of capital,” he says.

Mr Macreadie anticipates that demand for investment-grade bonds will surge as more investors seek safe, predictable income streams, against the background of greater market volatility and the phasing out of hybrids, which have long been favoured by retail investors due to their high-yield characteristics.

“With more reliable alternatives now available, corporate bonds, especially those with strong credit ratings, are a good way to continue earning consistent returns while reducing risk exposure,” Mr Macreadie says.

“These bonds not only offer income but also provide a solid investment-grade buffer, making them a stable choice for conservative investors who once turned to hybrids for yield.

“By reallocating into corporate bonds, investors can improve portfolio diversification and mitigate the risks tied to the winding down of hybrids.

“Corporate bonds represent a prime opportunity for investors to still access predictable income with minimal risk of capital loss,” Mr Macreadie says.

“IAM recently launched two Single Bond ETFs to fill this gap, offering investors access to a single underlying asset and providing exposure to interest payments and capital preservation, and are seeing strong inflows off the back of its launch.

“These new strategies are catering to the growing appetite from Australian investors for fixed income products that have lower volatility than equities and a greater level of income than cash and term deposits. This allows investors to easily access fixed income solutions and transition seamlessly from hybrids to more traditional forms of credit investment.

“We expect more products to come to market in 2025, as the demand for credit products is expected to rise given greater volatility in equity markets. Credit returns are less subject to variability and uncertainty compared to equities. With share markets down this year, bonds could do better, especially if we see a slowing in economic growth and interest rates fall even further in 2025 or 2026.”

The Australian share market has dropped around 2.7 per cent over the year to 24 March. In the US, equity markets have also dropped, led by technology shares, with the Nasdaq Composite Index down around 5.8 per cent over the year to date, and the S&P 500 down 2.0 per cent.

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