Low yield proposed on CBA retail bond

Anyone considering an investment in the five-year retail bond that Commonwealth Bank yesterday commenced preliminary marketing for may be selling themselves short on the interest rate.

The bank is seeking to sell around $500 million in bonds, and which will rank behind depositors and secured creditors for payment priority.

The offer period for the bonds will run from 22 November to 17 December.

The bank said yesterday said the five-year bond will pay a margin of between 100 basis points and 115 bps more than the 90-day bank bill rate, and is thus a floating rate security, or around 5.90 per cent based on current rates. Interest will be paid at the equivalent of six per cent over the first quarter.

CBA's website lists an interest rate on a 60-month term deposit of 6.40 per cent, with interest paid annually. Well connected investors or those dealing through specialist brokers might expect to receive a higher yield if investing at current rate.

Westpac is offering 7.0 per cent for a 60-month deposit. RaboDirect, ING Direct and AMP all offer interest rates of between 6.50 per cent and 6.75 per cent for this term.

Westpac, meanwhile, is preparing to market a three-year retail bond as well, the Financial Review reported, with the interest rate expected to be 100 basis points more than the 90-day swap rate, or around 5.80 per cent.

Westpac offers an interest rate of 6.20 per cent on a 36-monh term deposit at present.

Both CBA and Westpac will be marketing the bonds as providing a credible margin over swap in a rising interest rate environment.

Bonds pitched at retail investors are rare in Australia. One such offer this year was from Primary Health Care three months ago.