Amid all the conjecture over the monetary policy outlook in Australia, and talk of cuts in the cash rate target, there is little focus on the outlook for rates that borrowers will pay at a time of widening spreads on the wholesale debt of banks.Talk of "out of cycle" rises in variable-rate home loans and business loans has been muted, possibly because of the sharp competition on fixed-rate home loans over the last month or two.The banks have been able to lower fixed rates because they are priced off the swap rate for the appropriate term, and swap rates have been falling in line with government bond yields. All that falling swap rates tell us, though, is that the market expects interest rates to be considerably lower (below the current cash rate) in the future. Once the banks have to start passing on higher wholesale funding costs again (as reflected in the spread), then borrowing rates may need to rise on both floating and fixed rates.One way to look at banks' cost of funds is to look at the rising cost of insuring Australian corporate and sovereign debt. This is measured in terms of the credit default swap spreads for both. As noted in an article last week, the iTraxx index for five-year Australian corporate CDS has moved above 200 basis points, and CDS spreads for five-year Australian sovereign risk are approaching 100bps. What has been missed up until now is the significance of just how far five-year CDS spreads for the major Australian banks have moved over recent months.While the professional market is aware these spreads are now approaching 230bps, little if anything has been said about the fact that this exceeds the level seen at the peak of the GFC, as the chart for ANZ below shows. Is this widening in CDS spreads due to illiquidity in CDS contracts for the major banks? Or does it reflect the real cost of five-year debt for the banks at the present time? This is hard to answer and only the available data can be used as a guide.Clearing-house data on CDS trades for the major banks is possibly inconclusive, though it does show that the volume of contracts executed for the major banks increased noticeably from June onwards. This does not suggest illiquidity. However, there is little corresponding evidence from wholesale debt markets as to what is happening with bank credit spreads. The banks have done a good job of reducing scrutiny on this point. Wholesale debt issuance has been falling to minimal volumes over recent months but little pricing data has been revealed for those deals that have been done.In the domestic corporate bond market, the last five-year bond issue came from Commonwealth Bank in July, when it raised A$2.5 billion at a credit spread of 117bps. Around the same time, NAB raised US$1.0 billion for five years in the US s144A market at 160 bps over US Treasury bonds. This would have swapped back to Australian dollars at around