Income securities misunderstood: Macquarie

macquarie/national-australia-bank/interest-rates/

18 February 2000
| By Zilla Efrat |

Despite sagging recent performance, Macquarie Equities has come out in support of income securities in a report released earlier this week.

Despite sagging recent performance, Macquarie Equities has come out in support of income securities in a report released earlier this week.

Called Income Securities; a bright new investment product under pressure, the re-port argues that the current low price of income securities presents investors with a buying opportunity. Macquarie argues consumers can pick up the income securities below their issue prices and then score as interest rates rise, and supply and de-mand issues are resolved.

Macquarie, which issued its own income security last year, says a major reason for the current slump in the face value of these investments is the difference between the actual and the anticipated level of supply.

"The amount raised by corporates over the past six months has taken total issuance to over $5 billion, an extremely high level of supply for a new instrument," the group says in the report.

At the same time, the price of income securities has been depressed by the sale of AMP income securities ($745 million) by GIO shareholders. GIO shareholders who accepted the AMP takeover offer received AMP income securities in payment for their shares.

"These former GIO shareholders are presumably not typical holders of income se-curities. Their willingness to sell the AMP income securities has put considerable pressure on the AMP issue and all other income security issues," Macquarie says.

Macquarie argues that while income securities are higher risk types of investments than some other forms of debt or bank deposits, they also offer a yield which com-pensates investors for the extra risk.

In their favour, Macquarie says income securities offer retail customers brand rec-ognition (because household names are issuing them) as well as floating rate in-come and higher yields than other relative investments.

Bank savings accounts typically accrue only 0.25 per cent a year, cash manage-ment trusts typically less than 5 per cent and at the moment, one year term deposits at A rated banks earn interest of 5.50 per cent to 6.00 per cent.

However, an income security issued by the National Australia Bank, with a secu-rity credit rating of A, has a current simple yield of around 7.2 per cent, Macquarie says.

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