Banks increase bond issuance as margins widen

John Kavanagh

Australian banks returned to the wholesale funding market in the March quarter, with a big bond issuance program, just as funding costs were taking off.

According to the Reserve Bank’s latest Statement on Monetary Policy, while banks’ overall funding costs remain close to historical lows, the cost of new issuance risen with the increase in market yields over recent months and the increase in the cash rate in early May.

Much of the banks’ wholesale debt funding is linked to bank bill swap rates and three-month BBSW has increased to around 90 basis points since the start of the year. 

Australian bank bond issuance was $56 billion in the March quarter. The RBA said this was the biggest quarterly bank bond issuance in about a decade and followed historically low issuance in 2020 and 2021. About 60 per cent of those funds were raised in offshore markets.

Yields on three-year bank bonds are now around 4 per cent – a level they have not been at since 2013.

The RBA said bond issuance is likely to remain higher than in recent years as banks respond to the wind-down of the Committed Liquidity Facility over 2022 and expected Term Funding Facility maturities from next year.

The cost of Australian dollar funding from offshore short-term issuance, via the foreign exchange swap market, also moved higher over the past three months but remains low.

Repurchase agreement rates at the RBA’s open market liquidity operations increased from 10 bps, where they had been since late 2020 to 36 bps in early May. Part of this increase occurred following the RBA’s change to the open market operations hurdle rate at the end of March from the cash rate target to the rate on term-matched OIS plus a spread.

“In addition, the cessation of government bond purchases is, all else equal, likely to see some easing in deposit growth compared with 2021,” the RBA said.

The RBA’s bond purchases added to deposit growth because payments for bonds purchased from the private non-bank sector were credited to deposit accounts of the sellers.

Growth in low-rate deposits had put downward pressure on funding costs over the past two years.

Rates on at-call deposits were little changed in the March quarter but rates on new term deposits have increased.

Issuance of asset-backed securities remained strong in the March quarter. Of the $10 billion of RMBS issued during the quarter, non-banks issued $8 billion.

The RBA’s market liaison suggests “conditions since late February were a little more challenging than over the past year or so. For example, some issuers had to increase efforts to contact potential investors to replace notes.

“Spreads on RMBS have risen for both banks and non-banks since the start of the year, likely reflecting increased issuance of bank bonds weighing on demand for RMBS, with investors treating bonds and RMBS as close substitutes.”