Pimco is easing its bearish view on retail bank hybrids as the big four bolster their capital positions ahead of further regulation in 2016.
Pimco head of portfolio management in Australia, Robert Mead, said the pricing of new hybrid issuance is now reaching "fair value" for investors.
"For a long time, Pimco has been bearish on Australian retail bank hybrids because spreads were not fully compensating investors for the myriad risks, including their subordinated status to other debt," Mr Mead said.
With the RBA cash rate likely to remain low (and possibly fall further in the new year), income opportunities in the Australian capital securities space have "improved significantly", he said.
"But it is crucial to diversify. Combining Australian bank stocks, bank hybrids and residential investment property does not equal a diversified portfolio," Mr Mead said.
In fact, piling into all three asset classes would create a single leveraged position on the outlook for Australian residential property prices.
"More broadly, global credit and global capital securities, issued by banks specifically to raise regulatory capital, offer income that is less correlated with both the outlook for the Australian economy and investors’ dominant portfolio position – equities," Mr Mead said.