Banks’ funding costs have returned to pre-pandemic levels, with yields on bank bonds, mortgage-backed securities and at-call and term deposits all rising in recent months.

“Banks’ funding costs have risen with the ongoing increase in market yields and the increase in the cash rate since May. Much of the banks’ wholesale debt and deposit costs are linked to BBSW rates, which have risen sharply,” the Reserve Bank said in its latest Statement on Monetary Policy.

Banks have returned to the capital markets as their funding under the Term Funding Facility starts to mature from next year and as they respond to the wind-down of the Committed Liquidity Facility.

They raised A$30 billion in bond markets during the June quarter, with an average tenor of around four years, which is a little lower than the average of recent years. 

Bank bond yields increased sharply in the first half of the year and then moderated. Yields on three-year bank bonds neared 5 per cent in June for the first time since 2012, before falling back below 4 per cent.

The RBA said spreads on residential mortgage-backed securities have widened to be slightly above the average seen in the decade preceding the pandemic.

Banks were out of the RMBS market in 2021 but accounted for almost half of the $9 billion issued so far this year.

“Market liaison suggests that conditions since late February have been a little more challenging that over the preceding year or so. For example, some issuers had to increase efforts to contact potential investors to replace notes.”

The average rate paid on at-call deposits rose by less than the cash rate during the June quarter and “this is likely to have remained the case in July”.