Targeted Accrual Redemption Notes (TARNs): What Australian Investors Should Know in 2025

In Australia’s ever-evolving financial landscape, sophisticated investors are constantly seeking new ways to diversify portfolios and enhance returns. One instrument rapidly gaining attention is the Targeted Accrual Redemption Note (TARN)—a structured product offering unique risk-reward characteristics. With 2025 bringing fresh regulatory clarity and an uptick in demand for tailored solutions, understanding how TARNs work is crucial for any serious investor or adviser.

What Exactly is a TARN?

A Targeted Accrual Redemption Note (TARN) is a structured note where the investor accrues periodic coupon payments linked to the performance of an underlying reference (often interest rates, currencies, or equities). The key twist: once a pre-set cumulative coupon target is reached, the note is automatically redeemed, regardless of the initial maturity.

• Accrual mechanism: Coupons are typically paid if certain conditions (e.g., underlying asset within a range) are met at regular intervals.
• Redemption feature: Once total accrued coupons hit the agreed target, the note terminates early—potentially delivering returns faster (or, in adverse markets, slower) than a vanilla bond.
• Underlying assets: Commonly based on AUD swap rates, major currencies, or indices, but 2025 has seen a rise in TARNs linked to ESG benchmarks and inflation indices.

For example, an Australian investor might purchase a TARN linked to the AUD/USD exchange rate. If the pair stays within a defined range at each monthly observation, the investor accrues a coupon. When the total coupons hit, say, 12% of principal, the note redeems—even if the scheduled maturity was 3 years away.

Why Are TARNs Trending in 2025?

The Australian market has seen a notable uptick in TARN issuance and investor appetite in 2025, driven by several factors:

• Yield Enhancement: With the RBA keeping rates steady in the low 4% range, investors are turning to TARNs for higher yields, especially in a landscape where traditional bonds offer limited upside.
• Regulatory Comfort: ASIC’s updated guidance on structured products in late 2024 provided clearer disclosure rules and risk warnings, making issuers and advisers more confident in offering TARNs to sophisticated and wholesale clients.
• Customisation: Banks and structured product providers are increasingly tailoring TARNs to specific investor goals, such as targeting ESG-linked outcomes or hedging against specific currency exposures. This flexibility is attractive for SMSFs and family offices seeking bespoke solutions.

Recent market data shows that more than A$2.4 billion in TARNs were issued in Australia during the first half of 2025—a record volume, with major banks like NAB and Westpac expanding their offerings.

Risks and Considerations: TARNs Aren’t for Everyone

While TARNs can deliver outsized returns in the right conditions, they come with risks that investors must weigh carefully:

• Early Redemption Uncertainty: Predicting when the target will be reached is impossible, so investors may face reinvestment risk if the note redeems early—especially in falling rate environments.
• Complex Payoff Structures: TARNs often embed options and path dependencies. For example, missing a single coupon (if the underlying breaches a barrier) can delay or reduce total returns.
• Liquidity: TARNs are generally not listed on exchanges and can be difficult to sell before maturity or early redemption, making them best suited for investors who can lock up capital.
• Counterparty Risk: Like all structured notes, TARNs expose investors to the credit risk of the issuing bank or financial institution.
• Regulatory Suitability: ASIC guidance in 2025 reaffirms that TARNs are only appropriate for wholesale or sophisticated investors. Retail investors are generally excluded due to product complexity.

A practical illustration: A Sydney-based SMSF invested in a TARN linked to the ASX200 index with a 10% coupon target. When the market volatility in early 2025 saw the index briefly dip below the accrual range, the fund missed several coupons, pushing the redemption date out by six months and exposing the fund to opportunity cost as equity markets rebounded elsewhere.

Where Do TARNs Fit in a Diversified Portfolio?

For experienced investors, TARNs can play a role in portfolio yield enhancement, tactical positioning, or hedging. In 2025, many advisers are recommending them as a satellite allocation—never core—often capped at 5–10% of total portfolio value.

• Yield-seeking SMSFs: Using TARNs to boost income while managing duration risk.
• Corporate treasuries: Employing TARNs to align with forecasted cash flows and hedge specific exposures.
• High-net-worth individuals: Seeking bespoke payoff profiles not available in vanilla fixed income.

But suitability is key: every TARN is unique, and the fine print matters. Understanding the triggers, barriers, and potential redemption scenarios is essential before investing a single dollar.

The Bottom Line

Targeted Accrual Redemption Notes are a powerful—if complex—tool for those seeking yield and customisation beyond traditional investments. As 2025 unfolds, TARNs are set to remain a headline option for sophisticated Australian investors, but only those who take the time to truly understand their mechanics and risks will reap their potential rewards.