Are we running out of money for credit?

Advertisement
PiggyBank-About-to-get-Smashed

From Banking Day:

Mortgage lender FirstMac Ltd has had to pay a slightly higher margin on its latest issue of residential mortgage-backed securities. FirstMac priced the top tranche of its latest deal at 115 basis points over the bank bill swap rate. This compares with pricing of 110 bps over swap in June.

On Friday, the mortgage funder priced the FirstMac Mortgage Funding Trust 2E-2013, raising A$400 million. It was a dual currency issue, made up of A$255 million and £85 million.

…FirstMac’s chief financial officer, James Austin, said in a statement that the higher pricing on the top tranche was a result of the large amount of RMBS issued this year.

…The overflow of supply in mortgage-backed bonds may explain the revival in use of covered bonds by big banks, where the pricing is better.

This is exactly what you expect to see in a credit inter-mediation market that is beginning to outstrip the available savings. Remember, I have posited for some time that Australia will not be able to expand its credit growth like it used to because regulators now expect new loans to be matched by new deposits. That places an intrinsic limit on how much money can be borrowed offshore and, by extension, how quickly loans can grow. That has not been a problem as credit growth remained low but as it accelerates interest rates will have to rise to suck in more capital.

Advertisement

Obviously this story is about the RMBS market but the point remains the same. Savings are savings.

Does this mean the bottom for rates? Actually, no. The decoupling of credit growth from economic activity – owing to the capex cliff, consumer prudence etc – means that this is more likely to result in rate cuts as the RBA seeks to lower the structure of rates as funding spreads widen. In short, if the economic recovery stays weak, the bank will try to offset rising funding costs for the banks and non-banks with lower rates.

The story notes that covered bond spreads have come in since June, from 100bps to 85bps but that’s a little misleading in that the June period was still seeing elevated rates owing to the Chinese credit crunch. 5 year CDS prices for the major banks have been creeping out again recently too to about 90bps.

Advertisement

If we see spreads widen further we’ll know we’re hitting some funding speed limits.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.