National Bank of Canada's NVCC Notes: A Safe Haven in Rate Volatility?

The National Bank of Canada's June 2025 issuance of $750 million in Non-Viability Contingent Capital (NVCC) subordinated notes has sparked interest among income-focused investors. With an initial fixed rate of 4.333%, these notes offer a compelling yield in a market where Canadian government bonds trade at far lower rates. But the real intrigue lies in their hybrid fixed-floating rate structure and NVCC feature—two elements that could make these notes a strategic bet for those navigating a volatile rate environment.

The Hybrid Structure: Fixed Stability Meets Floating Flexibility

The notes are structured to pay a fixed 4.333% annually until August 15, 2030. After that, the rate switches to a floating mechanism tied to the Canadian Overnight Repo Rate Average (CORRA) plus a spread of 1.61%. This bifurcated approach offers investors two distinct advantages:

1. Fixed-Rate Certainty Before 2030: In an era of central bank uncertainty—the Bank of Canada's rate has swung between 2.5% and 3.75% since 2022—locking in a 4.333% yield for the next five years is a hedge against further volatility.
2. Floating Rate Adaptability After 2030: Once the reset occurs, the notes' rate will adjust dynamically to market conditions. This shields investors from prolonged exposure to a single rate environment, which could be critical if rates stabilize or decline post-2030.

Crucially, the fixed rate of 4.333% handily outperforms the Government of Canada's 10-year bond yield of 3.2% as of June 2025. . This spread suggests the notes are priced to reflect both their subordinated status and the risk of future rate resets—but it also makes them attractive for income seekers willing to accept that risk.

The NVCC Feature: A Double-Edged Sword

NVCC instruments are designed to bolster banks' capital buffers by allowing regulators to write down or convert the notes into equity if the bank's capital adequacy falls below thresholds. While this introduces a “bail-in” risk, it's important to contextualize it:

• National Bank's Strong Capital Position: With a CET1 ratio of 12.8% (well above the 7% regulatory minimum) and $536 billion in assets, the bank is one of Canada's most capitalized. The likelihood of a capital crisis requiring a bail-in is remote.
• Regulatory Safeguards: The NVCC trigger is tied to objective capital thresholds, not arbitrary bank decisions, reducing the risk of sudden defaults.

For conservative investors, the NVCC feature is a trade-off: you accept a small chance of principal loss in exchange for a higher yield. For context, the notes' credit ratings—Baa1 (hyb) by Moody's and BBB by S&P—are in line with peers, suggesting analysts see the risk as manageable.

Why Peers Are a Moving Target—and Why National Bank's Notes Still Shine

While the issuance of Royal Bank's 6.75% NVCC AT1 notes in June 蹈2025 highlights the sector's shift to hybrid capital structures, data on Canadian bank subordinated notes is sparse. This lack of transparency creates an opportunity:

• National Bank's Notes Are Explicitly Structured for Yield: Unlike some peers that issue perpetual notes with discretionary rate resets, National Bank's notes have a clear maturity (2035) and defined reset mechanism. This clarity is a rare commodity in an otherwise opaque market.
• The 4.333% Rate Is a Bargain Compared to Floating Risk: Even if Canadian rates drift lower post-2030, the floating rate's CORRA +1.61% spread ensures investors aren't left behind. In a best-case scenario, the notes could outperform peers' perpetual instruments with lower spreads.

Investment Thesis: Act Before the Reset

The clock is ticking until August 2030. Here's why investors should consider these notes now:

1. Lock in a 4.333% Yield in a Low-Rate World: With central banks globally signaling caution on rate hikes, the fixed-rate period offers a rare chance to secure a yield that outperforms both government bonds and many corporate bonds.
2. Diversify Rate Exposure: Pairing these notes with shorter-duration government bonds or floating-rate ETFs creates a balanced portfolio that profits from both fixed and variable-rate environments.
3. Capital Structure Confidence: National Bank's strong balance sheet and the NVCC's regulatory safeguards reduce the risk of sudden defaults, making these notes a safer bet than junk bonds or equities.

.

Risks to Consider

• Regulatory Triggers: While unlikely, a severe economic downturn could pressure capital ratios.
• Floating Rate Volatility: Post-2030 returns depend on CORRA movements, which could be choppy.

Final Take: A Smart Move for Income Hunters

The National Bank of Canada's NVCC notes are a rare blend of yield and strategic flexibility. Their hybrid structure and strong issuer profile make them a standout option in a market where safe income is scarce. Investors who act before the 2030 reset can lock in a 4.333% yield while avoiding the uncertainty of a floating rate—until it's time to benefit from it.

Recommendation: Consider allocating a portion of a fixed-income portfolio to these notes. For every $10,000 invested, the semi-annual coupon payments will deliver $216.65 in income—no small sum in today's environment. Just don't forget to reassess post-2030, when the floating-rate dynamics could shift the calculus.