Australian banks are well ahead of their funding needs, including repayment of their Term Funding Facility borrowings, and have the flexibility to adapt their issuance to market conditions, the Reserve Bank says. RBA head of domestic market, David Jacobs, said there was a pause in bank and corporate bond issuance in March, following the failure of Silicon Valley Bank and other US regional banks, but issuance resumed “after a week or so”.  Over the whole of March, Australian bank issuance was above average, including some large deals in offshore markets. Speaking at the AOFM Fixed Income Forum in Tokyo this week, Jacobs said the overall performance of the Australian government bond market, money market and bank bond market in the wake of the US banks failures and the collapse of Credit Suisse was “robust”. Jacobs said the bank failures were unexpected and led to pronounced moves in international markets. Government bond markets saw credit spreads widen, liquidity in secondary markets fall and issuance in primary markets dry up for a time. Conditions have since stabilised. “In Australia, we witnessed similar developments but local markets fared relatively well throughout this period,” he said. In local money markets, risk premiums widened slightly but not to unusual levels. The spread of short-term bank paper to overnight indexed swap rates widened by around 25 basis points at the three-month tenor, which was well within its recent range. The yields on bank paper did not actually rise, but rather the widening in spreads was driven by falls in OIS rates. In the government bond market, there was volatility as yields in Australia closely tracked those in the US Treasury market. The Australian bond market continued to function through this period, with a modest decline in liquidity and a widening of bid-offer spreads.  “Our market liaison indicated that there was no forced selling, rather, trading volumes declined as investors adopted a wait and see approach. There was no market dysfunction,” Jacobs said. Conditions in the Australian government bond market compared favourably with some other advanced economy markets, where liquidity fell further and yield anomalies along the curve increased. Jacobs said the most important factor in this robust performance was the perceived strength of the Australian banking system, notably its “unquestionably strong” capital levels and standards covering interest rate risk. In addition, a good balance of supply and demand contributed to resilient liquidity. In particular, government borrowing needs are modest relative to a number of similar economies. Jacobs said an issue for banks as they repay their TFF borrowings is that liquid assets in the banking system will fall. “The banks drawing on the facility received a liquidity upgrade because the facility allowed funding to be secured by a broad set of collateral. Banks mainly pledged securitised mortgages to the RBA as collateral and in return received very liquid central bank reserves in the form of exchange settlement balances. This boosted their high-quality liquid asset holdings. “As the TFF matures this process will go into reverse. Banks can acquire other forms of HQLA, which in Australia means Australian government securities or semi-government bonds.