Fitch Ratings released its fourth Australian Fixed Income Investor Survey last week, compiled in conjunction with KangaNews.

Not surprisingly, the survey found that institutional investors are worried about volatile commodity and equity prices, lower growth in China and the prospect of US interest rate rises. What is surprising is the finding that 50 per cent of investors expect credit spreads to widen over the next 12 months. Despite the widening trend in credit spreads underway since the third quarter of last year, half the market is expecting conditions to get worse.

Credit spreads to commonwealth government securities for non-financial A-rated bonds bottomed at 104 basis points and for BBB-rated bonds at 168 bps in July 2014. At the end of last month the spreads were at 181 bps and 272 bps.

Since the GFC the highest levels seen were 240 bps and 386 bps in June 2012. This was the time of the European sovereign debt crisis.

In the second quarter of that year Greece received its third bailout, then followed up with two elections and now wants to re-negotiate the third bailout package.
Are we heading into a similarly unstable environment with credit spreads heading back to previous wides or wider?

Markets have been anticipating slower economic growth in China and an increase in the US Fed Funds rate for quite some time now, in fact since about the start of the third quarter last year. How much further has this anticipation to run and is it, in fact, worse than the reality will be, when it occurs?

In the last two weeks there have been two benchmark bond issues in the domestic corporate bond market. The week before last Commonwealth Bank (rated AA-) sold A$2 billion of three-year floating rate notes, and last week Suncorp (rated A+) sold $750 million of five-year fixed and floating rate notes. Both issues priced at levels wide of secondary market pricing of comparable issues.

There is nothing unusual about new issue premiums for investors but, as noted last week, CBA seemed generous when it launched its FRN issue at 80 bps over bank bills while secondary market levels for existing issues with almost the same maturity, from ANZ and NAB, were marked at 70 bps in the Yieldbroker rate sheet released the night before.

CBA priced its issue at 78 bps and we understand that subsequent secondary market trading saw the spread quickly move in to a level comparable with the ANZ and nab issues.However, Suncorp seems to have been extraordinarily generous with the pricing of its five-year issue. The notes were marketed at 130 bps over the bank bill swap rate and ultimately priced at 125 bps over.

While there are no direct comparisons for the Suncorp issue, the bank has an August 2019 FRN, which was marked at 94 bps on Yieldbroker the night before and a November 2019 bond that was marked at 75 bps.
Is a rapid widening in credit spreads already underway or are secondary market pricing levels currently way out of alignment?