It always starts at the margin:
Offshore investors of Australian asset-backed securities auctioned $645 million of bonds last week in an apparent rush to raise cash amid signs the British pension fund crisis threatens to spill over into local credit markets.
Those sales of bonds issued by Australian non-bank lenders such as Athena, Pepper, Zip Co and Resimac were conducted via five BWICs (bids wanted in competition auctions) held throughout last week. A BWIC is a formal request for bids on a package of securities.
It came as UK pension funds scrambled to raise cash to meet margin calls relating to long-term interest rate positions, ultimately forcing the Bank of England into a dramatic intervention.
…the decrease in volume and significant increase in borrowing rates paid relative to its previous offering revealed how hostile credit markets had made financing scarcer and costlier for non-banks that rely on securitisation markets.
“For now it’s difficult to see the secondary securitisation market remain anything but offered, as opposed to the primary market, until such time as the broader bond market conditions settle,” wrote National Australia Bank director of corporate finance Ken Hanton.
RMBS volume is down 10% so far this year but it is likely about to cliff dive.
Stress is also rising in the core banking system but remains manageable for now. Interbank yields are on a tear, outpacing the cash rate:
And wholesale debt markets are getting chilly:
It’s not until we get above 100bps that funding becomes uneconomic. At this stage, there is little risk of out-of-cycle mortgage rate hikes.
But that pressure is building as DSIBs are rocked by rumour and counterparty fears:
Credit Suisse Group AG’s new chief has asked investors for less than 100 days to deliver a new turnaround strategy. Turbulent markets are making that feel like a long time.
The cost of insuring the firm’s bonds against default climbed about 15% last week to levels not seen since 2009 as the shares touched a new record low. On Friday, Chief Executive Officer Ulrich Koerner reassured staff that the bank has a “strong capital base and liquidity position” and told employees that he will be sending them a regular update until the firm announces a new strategic plan on Oct. 27.
No broad panic yet but spreads are moving in the wrong direction fast.
