Credit spreads dropping and A$ rising

The fourth quarter got off to a solid start on Thursday, with bond issues totalling more than A$2.0 billion, from KfW, EIB (again), Rentenbank and ABN Amro Bank Australia.

KfW added A$500 million to its May 2015 line, at a spread of 20 basis points over swap, to take outstandings to A$1.0 billion. This is KfW's second addition to this line since it was opened in April 2005.  

EIB added a further A$600 million to its August 2019 line to take outstandings to A$1.65 billion. Again, this is the second top-up since opening the line in July.

Successive pricing on a spread to swap basis has been 55 bps, 43 bps and now 21 bps.

And Rentenbank added to its July 2014 line for the second time too. The A$350 million increase takes outstandings to A$1.0 billion and the pricing, at swap plus 25 bps, is well below the 34 bps paid on the last top-up less than a month ago.

ABN Amro Bank Australia used an Australian government guarantee to raise A$600 million for just 15 months at 20 bps over swap. The bank is rated A+ by Standard & Poor's, in line with ING Bank (Australia).

Inter-American Development Bank finished the week with a A$250 million addition to its May 2014 line, on Friday. This is the first addition to this line, taking outstandings to A$1.0 billion. Priced at a spread of 65 bps to CGS, the credit margin has narrowed almost 40 bps since the line was opened in May.

With the multiple additions to various lines by various issuers as described here, the extent of the continuing contraction in credit spreads is easy to see. This provides further confirmation of the increasing confidence of investors in relation to both their demand for product and the price they are prepared to pay for it.

Moreover, the rush of supranational and agency issuance this week (A$2.3 billion) was in large part driven by offshore investor demand. Again this points to growing investor confidence and, in this case, demand for riskier Australian dollar denominated assets. This was also reflected in AOFM's A$4.0 billion index bonds sold during the week (and described in a later article).

If this international investor demand is sustained, this - along with chatter over rising domestic interest rates - may prove to be one central factor is pushing the Australian dollar back over 90 US cents and beyond.

It's still only nine months ago that the exchange rate bottomed out around US 61 cents.