Subordinated Notes in Australia (2026): Understanding Yields, Risks and Their Role in Your

Subordinated notes are a type of debt instrument issued by banks and financial institutions. When you invest in a subordinated note, you are lending money to the issuer for a set period in exchange for regular interest payments. What sets subordinated notes apart from other bonds is their place in the repayment hierarchy: if the issuer faces financial trouble, holders of subordinated notes are repaid after senior debt holders, but before shareholders. This lower ranking means subordinated notes carry more risk than senior bonds, but generally offer higher yields as compensation.

Key Features of Subordinated Notes

• Higher yields: To compensate for their increased risk, subordinated notes typically pay more interest than senior bonds or government securities.
• Interest structure: These notes may offer either fixed or floating interest rates, allowing investors to choose based on their outlook for interest rates and personal risk tolerance.
• Common issuers: In Australia, large banks and financial institutions are frequent issuers of subordinated notes, often as part of their regulatory capital requirements.

Recent changes in banking regulations have influenced the Australian fixed income market. Regulatory bodies have required banks to hold more capital that can absorb losses in times of stress. As a result, banks have issued more subordinated notes to meet these requirements, increasing the supply and variety of these products available to investors.

In 2026, several factors have contributed to the popularity of subordinated notes:

• Yield premium: Subordinated notes generally offer higher yields than term deposits and government bonds, making them attractive to income-focused investors.
• Perceived credit strength: Australia’s major banks are widely regarded as financially stable, which can make their subordinated notes appealing to those willing to accept some additional risk.
• Greater choice: Increased issuance means investors have more options to choose from, with varying maturities, structures, and interest payment types.

While the higher yields of subordinated notes can be appealing, it’s important to understand the risks involved. These products are more complex than basic savings accounts or government bonds, and their risk profile is different.

Credit Risk

If the issuing bank or financial institution experiences financial difficulty, subordinated note holders are lower in the repayment order. In extreme cases, such as a bank failure, investors could face losses. Some subordinated notes also include provisions that allow for conversion to equity or even write-off in certain crisis scenarios, which can increase the risk of capital loss.

Liquidity Risk

Subordinated notes are typically listed on the ASX, allowing investors to buy and sell them on the secondary market. However, during periods of market stress, liquidity can decrease, making it harder to sell your notes quickly or at a favourable price. This is different from term deposits, which are generally held to maturity and not traded.

Call Risk

Many subordinated notes include call dates, which give the issuer the right (but not the obligation) to redeem the notes early. If the issuer chooses to call the notes when interest rates have fallen, investors may need to reinvest their funds at lower yields. The timing of these calls is at the issuer’s discretion, not the investor’s.

Complexity

Subordinated notes can have features such as conversion clauses, step-up interest rates, or other terms that may be unfamiliar to some investors. It’s important to read the product disclosure statement or prospectus carefully to understand the specific terms and conditions of any note you are considering.

For investors looking to diversify their sources of income, subordinated notes can be a useful addition to a broader fixed income strategy. They may offer higher returns than more conservative options, but they should not be seen as a direct substitute for cash or high-grade government bonds.

Practical Tips for Investors in 2026

• Review the prospectus: Always read the full details of the note, including maturity, interest structure, and any conversion or write-off provisions.
• Assess the issuer’s financial strength: Consider the credit rating and financial health of the bank or institution issuing the note. Major Australian banks are generally considered robust, but smaller issuers may carry higher risk. You can find more information about credit ratings and financial products at our finance section.
• Consider your liquidity needs: Only invest funds you can afford to leave untouched until the note’s maturity or call date, as selling early may not always be possible or profitable.
• Balance your risk: Subordinated notes should form just one part of a diversified portfolio. Mixing them with safer assets can help manage overall risk.

It’s helpful to compare subordinated notes with other common fixed income investments:

Subordinated notes may suit investors who:

• Are seeking higher income and are comfortable with additional risk.
• Have a good understanding of fixed income products and their features.
• Are able to commit funds for a set period and do not need immediate access to their investment.
• Want to diversify their income sources beyond traditional term deposits and government bonds.

• Subordinated notes offer higher yields, but with higher risk and complexity.
• They are typically issued by banks to meet regulatory capital requirements.
• Investors should carefully assess the terms, issuer strength, and their own risk tolerance before investing.
• These notes are best used as part of a diversified fixed income strategy, not as a replacement for safer assets.

What is the main risk of investing in subordinated notes?

The main risk is that if the issuer faces financial trouble, subordinated note holders are lower in the repayment order and could face losses, especially if the notes are subject to conversion or write-off provisions.

Are subordinated notes suitable for all investors?

No, subordinated notes are generally more suitable for experienced investors who understand the risks and can commit funds for a set period.

How do subordinated notes compare to term deposits?

Subordinated notes usually offer higher yields but come with higher risk and are traded on the ASX, while term deposits are lower risk and funds are locked in until maturity.

Can I sell subordinated notes before maturity?

Subordinated notes are typically traded on the ASX, so you may be able to sell them before maturity. However, liquidity can vary and prices may fluctuate, especially during periods of market stress.