Strong investor demand for $1.25b CommBank bond issue

The country's biggest bank has seized on signs of a recovery in investor confidence, borrowing $1.25 billion on domestic money markets at a competitive cost to the lender.

In the first big domestic issue of senior debt by a local bank in nearly two months, the Commonwealth Bank sold $1.25 billion worth of bonds, which will mature in four years. The bonds will pay investors a yield of 85 basis points above the benchmark bank bill swap rate. The spread of 85 points - a gauge of the cost of the debt to the bank - is similar to the cost of wholesale debt that faced banks earlier this year, when markets were more subdued.

It is also significantly better than the cost of funding implied by credit default swaps, a widely used proxy for funding costs.

The head of Australian credit research and strategy at Deutsche Bank, Gus Medeiros, said the bonds were priced at a relatively attractive level for the bank.

"It shows good investor demand," he said. "It's been a while since the major banks have tapped the domestic market with a benchmark deal. This probably supported [the] transaction."

The raising comes after a turbulent period on money markets, triggered by US Federal Reserve chairman Ben Bernanke signalling he may rein in the Fed's $US85 billion ($93.5 billion)-a-month stimulus program later this year.

Bond markets reacted violently to the comments, raising concerns among some bankers they would also face a significant increase in wholesale funding costs. Tuesday's Reserve Bank board minutes noted there had been "minimal new issuance" by the big four recently.

Markets are betting there is a slightly better than even chance the Reserve Bank will cut the cash rate next month, raising the prospect banks may look to hold some of the reduction from borrowers if wholesale costs have increased.

But the strong demand for the Commonwealth Bank issue suggests pricing on wholesale markets remains competitive.