Strong investor demand for $1.25b CommBank bond issue
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.
Frequently Asked Questions about this Article…
The Commonwealth Bank sold A$1.25 billion of four‑year senior bonds in the domestic market. The bonds pay a yield of 85 basis points above the benchmark bank bill swap rate, and this was the first big domestic senior debt issue by a local bank in nearly two months.
A spread of 85 basis points above the bank bill swap rate means investors receive that extra return over the benchmark money‑market rate. It’s a measure of how much extra yield the bank must pay to borrow; in this case the spread was described as relatively attractive and similar to wholesale debt costs banks faced earlier in the year.
Strong demand suggests confidence among investors and helped the bank achieve competitive pricing on the deal. Deutsche Bank’s Australian credit research head said the pricing looked attractive and that good investor demand likely supported the transaction.
The bond sale came after a turbulent period in money markets triggered by comments from US Fed officials about possibly reinining asset‑purchase stimulus. That volatility had raised concerns banks would face higher wholesale funding costs, so the successful Commonwealth Bank issue indicates some investor confidence has returned despite earlier market swings.
Not necessarily. The article notes markets are betting on a possible cash‑rate cut and that banks may choose to hold some of a rate reduction from borrowers if wholesale funding costs have risen. The Commonwealth Bank's strong bond demand suggests wholesale pricing is still competitive, but any decision on mortgage rates rests with individual banks.
Credit default swaps (CDS) are financial instruments often used as a proxy for a borrower’s perceived funding cost or credit risk. The article reports the Commonwealth Bank’s bond pricing was significantly better (cheaper for the bank) than the cost implied by CDS levels, meaning the actual deal priced more favorably than what CDS spreads had suggested.
Reserve Bank board minutes noted there had been 'minimal new issuance' by the big four, reflecting caution after recent market turbulence. Volatility in bond markets following talk of reduced US stimulus made banks reluctant to tap domestic wholesale markets for a period.
The main takeaways are that investor confidence appears to be recovering in domestic wholesale markets and that the Commonwealth Bank achieved competitive pricing on a sizable A$1.25 billion, four‑year deal. For individual investors, it’s a reminder to watch wholesale funding conditions, RBA decisions and how banks respond to any cash‑rate changes, while considering how fixed‑income or bank credit exposure fits their own risk and return goals.
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