Tactical issuance contains credit spreads for now

With the exception of a large private placement undertaken by Westpac two weeks ago (which we'll come back to) there has been no issuance in the domestic corporate bond market by Australian banks since April. And while international issuance by the Australian banks has not ceased over the period, issuance has been in the form of either very small private placements or relatively short-dated larger issues.

What we have seen in recent months is eerily similar to what was seen over the period from September to November 2008, prior to the introduction of the Commonwealth government guarantee for the wholesale debt raisings of the banks. But the lack of issuance this time appears to be by choice, with market perceptions of the credit spreads that bank bonds should attract being carefully managed.

If we start with a macro view and consider the banks' funding and liquidity, the first observation that can be made is that the quarterly 'pillar III' reports released by the banks in recent weeks shed no light on either. Funding and liquidity are not addressed as a part of Pillar III reporting, which seems a surprising shortcoming in an otherwise useful report for assessing bank performance.

In any event, if funding and liquidity were addressed it would be for the first quarter of 2010, which may not say much about how the banks are faring in the current quarter.

What can be said at the present time is that the useful indicators of systemic liquidity - daily exchange settlement account balances and the three-month overnight index swap to bank bills spread - are little changed from our observations two weeks ago and are certainly not at the stressed levels of late 2008.            

As for the banks' funding, anecdotal evidence says that the banks are well advanced with their annual funding programs, leaving conclusions only to be drawn from the issuance observed and other market indicators. This evidence suggests a distinct lack of clarity around how much wider credit margins should be in this second act of the GFC.