A significant portion of this is held by SMSF investors, many of whom will now be seeking suitable alternatives, including from ETFs and private credit to traditional fixed income investments, each offering different risk profiles and return potential.

Chamath De Silva, head of fixed income at Betashares, said hybrid securities issued by the big Australian banks and local investors have long been a match made in heaven.

“Combining some of the best characteristics of debt and equity, they’ve allowed investors to juice more franked income from their portfolios. Listed, liquid, investment grade, and typically far less volatile than ordinary shares, bank hybrids ticked a lot of boxes for income-seeking investors and their advisers,” De Silva said.

“While the asset class is expected to remain part of the investment landscape until 2032, investors should begin thinking about how their income strategies will need to evolve as APRA phases out bank hybrids and replaces them with other forms of regulatory capital, such as subordinated bonds.”

He continued that Australian investors who have relied on hybrids in the past for income and portfolio diversification should consider traditional investment-grade fixed-income markets.

“While these markets have historically been the domain of institutional investors, the increased availability of fixed income ETFs has opened access to all investors, enabling far more well diversified income solutions,” De Silva added.

“This shift is particularly timely in an environment where the Reserve Bank is cutting rates and expected to cut further, and where generating income from bank deposits will be more challenging.”

Furthermore, he said, the broader range of fixed income securities available via ETFs includes all major segments of the local Australian investment grade universe, in both fixed and floating rate forms.

“These include, but are not limited to, government bonds, corporate bonds, and both senior and subordinated bank credit. Many of these sectors are providing comparable yields to hybrids and often with superior risk-adjusted returns,” he said.

Lee Hayes, managing director, head of distribution for MA Financial, said private credit offers SMSF investors a superior alternative to AT1 hybrids.

“With attractive risk-adjusted returns given its proprietary and bilateral nature, private credit can deliver the strong and consistent income investors typically associate with hybrids, yet with less correlation to equity markets and bonds,” Hayes said.

“Additionally, the growth of listed private credit options provides investors with similar accessibility. One of the factors behind APRA’s decision to phase out AT1s was to protect both the banks and hybrid investors in periods of extreme market stress.

“Of course, such events are likely to impact most asset classes to some degree, however with private credit this can be mitigated by investing with managers offering large and well-diversified portfolios, together with robust governance frameworks. Manager selection is critical.”

Gaby Rosenberg, co-founder of Blossom App, said fixed income has become a standout asset class in its own right, particularly in a higher interest rate environment where investors are increasingly looking for predictable, lower-risk income.

“SMSFs are increasingly exploring ways to diversify their fixed income allocations, and we’re seeing growing interest in Blossom’s approach,” Rosenberg said.

“Blossom was designed for trustees looking for liquidity and focusing on capital preservation. Our app-based interface simplifies the investment process, and regular reporting is provided to assist with SMSF transparency and compliance requirements.”