The fuse is lit under bank funding costs in 2016

From Banking Day:

Spreads agreed on newly minted wholesale bank debt from Australian names priced at much wider levels than prevailed in 2015.

Philip Bayley, in his weekly DCM Review, chronicled the vibrant start to the fixed income market over the opening weeks of January 2016.

Commonwealth Bank raised A$2 billion for five years at a credit spread of 115 basis points.

In the same period in January last year, Westpac was the major issuer with a A$2.8 billion five-year debt priced at a spread of 90 bps.

The difference in the pricing of the Westpac and CBA issues highlights one trend of 2015 – widening credit spreads.

With the exception of the first quarter of 2015, credit spreads for the major banks steadily widened over the course of the year.

That said, it seems that the domestic market is playing catch-up with international markets. When Westpac was paying 108 bps for five-year funds in the domestic market in October, CBA was paying 129 bps over, on a swapped back basis, in the US 144A market.

Westpac followed CBA a month later in the US 144A market, and paid the equivalent of 126 bps over, for five-year funds.

National Australia Bank, the principal offshore issuer of Australian banks last week, turned to the US144A market. NAB sold US$3.5 billion, including US$1 billion for five years. The five-year tranche swapped back at 129 bps over bank bills, so foreign funding costs are at least looking stable amid a broader market ruckus.

Yet, Bayley highlights: “Credit spreads for the major banks have been relatively steady since October but can still move wider in the domestic market as local investors seek to eliminate an arbitrage opportunity.

“Indeed, CBA’s just completed domestic issue is not performing in the secondary market.

“Currently, domestic five-year credit margins are at levels not seen since September 2012. Credit margins for the major banks were in decline then, having peaked at 185 bps in February.

“This was at the time of the euro-zone sovereign debt and banking crisis. And given comments made in Davos last week by William White, Chairman of the OECD’s Economic and Development Review Committee, we might be on the edge of another euro-zone banking crisis.”

The latest CBA CDS price is 97.5bps, close to breaking out from 2015 highs with a trend that tells you all you need to know:


The cause is not Europe, it is the junk bond crash emanating from the US energy sector and steadily going global, the Mining GFC in other words. We’ll no doubt see an easing in spreads whenever we get bear market rallies but you can expect the trend up to hold. Remember that major banks are effectively locked out of markets somewhere around 150bps and non-banks at around 120bps. I expect we’ll breach both before this is done.

You can kiss meaningful interest rate relief  goodbye.

David Llewellyn-Smith
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