The latest movement in the bank debt markets has seen a sizeable narrowing of spreads. Spreads on domestically issued covered bonds have come in from their average issue price of 170 basis points over the bank bill swap rate to around 140 basis points.This may prove to be good news for banks and their customers, but the Reserve Bank's assistant governor financial markets, Guy Debelle, cautioned that "uncertainty is likely to persist for some time".Debelle, who was speaking at a Bloomberg seminar in Sydney yesterday, said the new year had seen a thawing in bank debt markets. "Investors were reluctant to take any position towards the end of 2011, either to lock in gains already accrued or to avoid exacerbating losses in an environment of considerable uncertainty," he said."With the beginning of the new year, the investment slate is clean and risk tolerance thus far is on the increase. "However, there is a reasonably large amount of bank debt maturing in the first quarter and concerns continue to be expressed about that. An additional wrinkle is that a fair chunk of debt maturing is government-guaranteed bank paper."While the market has re-opened, there has been a sizeable step up in the cost of issuance. Investors are demanding much higher compensation for bank credit risk than they were in mid-2011."According to the RBA's figures, the cost of senior unsecured bank debt was an average of 127 basis points over the bank bill swap rate in June last year. In January that cost had risen to an average of 223 basis points over the swap rate, and now, in February, it has eased back to 185 basis points.The average cost of domestic covered-bond issues in January was 170 basis points over the swap rate, and the cost of offshore covered-bond issues was 210 basis points.The average cost of residential mortgage-backed securities issuance rose from 110 basis points over the swap rate in June last year to 140 basis points at the end of the year.In addition, the rise in wholesale funding costs has been accentuated for funds raised offshore by a widening in the cost of swapping foreign exchange into Australia dollarsDebelle said: "The covered bonds issued by Australian banks in January were at markedly wider spreads then their unsecured issuance in the middle of last year. This is notwithstanding the fact that covered bonds are senior in the creditor queue."In the past few days there has been a sizeable narrowing of spreads in the secondary market for domestic covered bonds."