Credit spreads on bank debt moving wider

The first two full weeks of January are typically busy with the major Australian banks and Macquarie raising a significant volume of funds in international bond markets. The start of 2015 has been no exception, with banks issuing the equivalent of A$11.8 billion of bonds in international bond markets.

The larger than usual volume this year does not appear to be driven so much by maturities or the need for new funds to lend, as by a fear of deteriorating conditions in bond markets.

The record year for such issuance was 2009, when the equivalent of A$19.9 billion of bonds was issued by the banks in international bond markets in the first two full weeks of the year.

Issuance that year was driven by the fear of missing out - the fear that markets might suddenly close again during the height of the GFC. Banks were also taking advantage of the newly minted Commonwealth government guarantee.

In subsequent years, total issuance over this period has averaged around A$10 billion. But in 2014, the volume increased significantly to the equivalent of A$14.3 billion.

Some of the 2014 increase was due to the five-year bonds issued in 2009 maturing, and some of it was due to strong investor demand for covered bonds. Covered bond issuance slowed to a trickle in Europe in the second half of 2013 and so the Australian banks met strong demand for covered bonds, with the equivalent of A$4.4 billion being issued.
 
Credit spreads for the banks moved wider over the second half of 2014, and continue to do so.

For example, in August National Australia Bank raised A$1.7 billion for 5.25 years at a credit spread of 82 basis points over the bank bill swap rate, in the domestic market. In November, ANZ paid 85 bps over swaps for A$2.0 billion of five-year funds in the same market.

Last week, Commonwealth Bank sold €1 billion of five-year floating rate notes in the Euromarket. The cost of this funding hedged back into to Australian dollars for the Commonwealth Bank equates to 90 bps over bank bills.

A credit spread of 90 bps is exactly what Westpac paid for A$2.8 billion of five-year bonds and floating rate notes issued in the domestic market last week.

If further confirmation of widening credit spreads is required, ANZ paid 53 bps on A$1 billion of three-year floating rate notes issued in the domestic market last May. Last week, the bank sold US$500 million of the three-year floating rate notes in the US s144A market, and incurred a swapped back cost of 74 bps over bank bills.

And in the credit default swap market, five-year risk on the major Australian banks was priced at 50 bps at the end of September. The spread is now 66 bps.