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[SYDNEY] A worsening dislocation in the US money markets is helping to drive a run of jumbo dollar bond sales from Australia's major banks, as the likes of Westpac Banking Corp take advantage of attractive hedging costs to lock in low rates.
Due to a need to switch funding away from shrinking US money markets, the four biggest Australian lenders have sold US$30.1 billion of US dollar bonds so far in 2016, outpacing the US$25.5 billion raised in the whole of last year.
A rule change in the US money markets is pushing global banks away from short-term commercial paper towards longer-term bonds. Tighter swap costs and huge US investor demand are, for once, enabling Australian banks to beat their local funding costs in the domestic bond arena.
The US$1 trillion US commercial paper market, where debt typically matures within nine months, has been shrinking ahead of reforms to be implemented on October 14.
Among the changes intended to prevent a repeat of aspects of the 2008 crisis, prime money market funds will be able to charge liquidity fees and suspend redemptions.
The changes have prompted many investors to pull money out of prime money market funds, triggering a jump in short-term rates including Libor. Three-month dollar Libor touched 0.818 per cent on August 12, its highest since May 2009.
That, in turn, makes the longer-term US bond market, where yields remain close to historic lows, more attractive to debt issuers.
In its annual report on August 10, Commonwealth Bank of Australia, the country's largest lender, revealed a A$9.5 billion (S$9.74 billion) plunge to A$28.4 billion from A$37.9 billion in its US CP programme between December 31 2015 and June 30 2016.
Australia's well-regarded Double A banks are also enjoying huge demand from yield-hungry US bond investors, the appetite of which has deepened after the Fed's tightening cycle proved to be less aggressive than assumed.
Australia and New Zealand Banking Group drew an order book of US$18 billion for a US$1 billion 144A/Reg S Additional Tier 1 note in June, while Westpac also reaped the benefits on August 11 when it received orders of US$12 billion for a record-breaking US$5 billion five-part senior unsecured offering - the biggest trade on record for an Aussie lender in any currency.
Westpac's US$2 billion each of fixed and floating-rate three-year and five-year notes swapped back to Australian dollars at 72bp and 107bp over BBSW, respectively, according to a banker away from the deal.
Remarkably, these levels are below the 85bp margin now seen for a new Australian dollar three-year bond and the 113bp spread ANZ paid for a domestic five-year benchmark on August 9. Banks in the country have typically secured their cheapest wholesale funding in the local bond market.
Westpac's US$1 billion 10-year bond swapped back to about 162bp over BBSW. Although well above the 125bp clearing rate for ANZ's A$100 million 10-year medium-term note on July 7, the domestic market cannot compete on size for long-dated tenors.
Among other factors encouraging US dollar issuance are a flat US swaps curve, attractive Australian/US dollar cross currency basis swap levels of around 20bp at the five-year mark, as well as a decline in Australian dollar forwards.
The three-month Aussie/US dollar forward is now below 20 swap points, down from 30 at the start of the year and 55 at the beginning of 2015. This gives an implied hedging cost of below 1 per cent a year - the lowest the 2008 crisis.
It is not just US dollar issuance that has expanded. Bond issuance from all Australian financials, including the Sydney branches of international banks, has surged to A$38 billion from A$27 billion as the segment's share of all Aussie dollar supply jumped to 42 per cent from 30 per cent, according to Thomson Reuters data.
Some of this growth is a direct result of regulatory changes that require banks to source more financing from deposits and longer-dated wholesale bonds.
The Australian Prudential Regulatory Authority proposes the country's 15 largest ADIs maintain a net stable funding ratio - the ratio of stable funding to longer-term liabilities - of at least 100 per cent as of 2018 and 105 per cent as of 2020.
Banks recently raised their term-deposit rates after the Reserve Bank of Australia cut interest rates on August 2, to help boost demand for these products.
Macquarie Securities estimated in April that Australian banks' deposits were around A$20 billion short of their NSFR requirements.
Banks have also strived to increase the average maturities of their new Australian dollar bonds to 5.2 years in 2016 from 4.3 years in 2015, while expanding overall supply almost 40 per cent in the local market.
One syndication manager, however, suggests the banks' total annual wholesale funding requirements are likely to be similar to last year at A$130-A$140 billion, with borrowing needs contained at the ending of the mining boom and an expected slowdown in economic growth.
Issuers are also moving up their funding plans to avoid any potential shocks on the horizon, including September's US interest-rate decision and the US presidential election in November.
"Banks like to make hay. while the sun still shines," he said.