Banks buying back bonds

Banks are snapping up billions of dollars of debt raised in overseas markets with the help of the government's top-notch credit rating.

Under the guarantee of wholesale borrowing, which provided a lifeline to the financial sector at the height of the global financial crisis, banks could pay the government a monthly fee in return for using its AAA credit rating.

With conditions improving over the past year, banks are buying back tens of billions of dollars in guaranteed bonds and refinancing at lower interest. Until now, the focus has been on Australia.

But on Thursday Westpac said it would spend $US3.75 billion ($3.95 billion) buying back US-dollar-denominated debt that had been guaranteed by the Australian government.

Philip Bayley, a credit market specialist with ADCM Services, said he believed it was the first time a bank had bought back guaranteed debt from overseas, and may have occurred because much of the domestic debt had already been purchased.

Westpac's purchase follows a $435.8 million domestic buyback from Bank of Queensland last week, and reflects the sector's improving funding situation.

Westpac said the deal lowered the amount of debt it needed to refinance over the next financial year by $4 billion. Its shares rose 2.6 per cent, or 71¢, to $28.18.