The developments in Europe are impacting global fixed income margins. Currently, wholesale funding is available – but only on a relative value basis.
Spreads have widened significantly, which has been illustrated by pricing of the recent flow of covered bond deals by the major banks. If we look back to 2009, pricing for unsecured senior funding for the banks was at around 80 basis points. By this time (February) last year it had risen to 100 basis points, but in the last year it has risen quite dramatically, as evidenced by NAB’s recently priced A$1.5bn transaction at +185bps.
In 2012 we are yet to see any RMBS issuance; however we believe pricing relative to last year has increased significantly in line with covered bonds and unsecured margins. Notwithstanding pricing the introduction of covered bonds has had, one positive outcome being the emergence of a new array of domestic investors in secured funding deals.
The Eurozone crisis will continue to play a major role in the direction of credit markets and bank funding. Ratings downgrades of sovereigns, banks and corporates, as has been witnessed in Europe and the ongoing possibility of a disorderly Greek default has had a deep impact on the cost and more importantly, the availability of credit flows.
At the end of 2011 the European Central Bank offered half a trillion euros of three year loans to European banks in an attempt to open up wholesale markets and ease borrowing conditions and even though this was largely successful in evading a banking crisis in Europe, the interbank market remains cautious, and this uncertainty continues to be reflected in the cost of funding available to all financial institutions including Australia. Even though Australia doesn’t have a major exposure to European banks or sovereigns and is therefore protected somewhat from the unfortunate scenario of a Greek default, Australia is a net importer of capital and as such these events occur in markets where we source funding from.
Europe is evolving on a daily basis and while it is still unclear as to how the greater EU will emerge, it is generally accepted that in order to meet BASEL III capital targets, European financial institutions will have to significantly reduce the size of their balance sheets to manage sovereign debt exposures and comply with new regulatory capital requirements. The outcome of this will be credit rationing amongst the Euro banks.
The uncertainty which prevails is likely to persist for the near future, as conditions in Europe continue to be monitored. In the meantime funding costs for banks or non-banks need to be reflected in mortgage pricing, for a bank or non-bank to be able to run a viable business.
Ultimately as markets stabilise, funding costs will reduce, which will flow on to mortgage rates and ultimately consumers would benefit from lower rates.