Over the past year there has an ongoing debate about Australia’s little financial crisis. It was the dramatic widening of bank-to-bank funding costs. Coats starting falling as the Hayne Royal Commission wound up. Westpac explained the spread compression then by observing an abundance of cash:
Is the lack of a March “turn” a sign of things to come? In outright terms, 3m BBSW has fallen to the lowest outright level since early 2018, effectively delivering a rate cut to BBSW-based borrowers since the turn of the year. At just above 1.8%, they are on the cusp of moving back into the OIS+15-30bp range that prevailed throughout 2016 and 2017. So how likely is that? The lack of a of March “turn” has surprised many and positions entered to take advantage of higher rates have been exited over the past week. BOB spreads are at, or near, the bottom of their ranges 3 and 12 month ranges (top chart), suggesting that the market sees lower levels as more sustainable. It is probably to be expected that hedging and funding strategies would have adjusted over the past year, smoothing quarterly effects, however we think there is also an usual amount of “cash” available at present. Investment managers have been keen to take advantage of the inverted front end of the bond curve, targeting the higher yields at the short tenors. And beyond that, this week and this quarter have seen a recorded amount of cash paid out as dividends (bottom charts).
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