The rapid rise in bond yields in Australia and the United States has caused banks’ funding costs to rise sharply, with one of the country’s top bankers covering the war in Ukraine last month also causing renewed fragility in bond markets Has .

While foreign bond markets are far from closed, the banker says they are “two or three steps closer than before” because of the war. The RBA is working closely with banks to monitor the situation.

Banks are considering when and how to enter offshore markets.

While conditions have eased over the past week or so, the banker said there have been days over the past month when his traders have deliberately stayed out of the market due to difficult conditions.

Perception matters in bond markets, and a borrower never wants to look distressed if they can help it. “These days you wouldn’t raise if you didn’t have to,” says the banker.

The general approach of Australian banks has been to hit when the funding markets are benign, raising larger amounts but tapping the markets less frequently.

Spreads are broadly similar to pre-pandemic levels, but that’s still a change from the last two years, when central bank easing and asset purchases effectively suppressed volatility.

Complicated way ahead

The funding challenge banks face over the next 12 to 18 months is further complicated by the winding-up of the government’s Term Funding Facility, which gave banks access to very cheap financing during the pandemic. These will be phased out over the next 12 months and will need to be replaced with more expensive debt.

The funding challenge is manageable, and in some cases higher funding requirements indicate a quality issue – credit growth at Commonwealth Bank and National Australia Bank e.g. B. requires them to step up their fundraising efforts.

While banks are waiting for the RBA to move before raising their standard variable interest rates, there is movement in other products. Fixed rate lending continues to rise, with Rate City reporting last week that ANZ and NAB last week hiked fixed rates for the sixth and seventh time in the last six months.

Corporate loans, the price of which deviates from the exchange rate on bank bills, are also increasing.

However, there are fears that competition in the mortgage markets could limit banks’ margin boost from rising interest rates.

Barrenjoey analyst Jonathan Mott argues that with approximately $250 billion worth of fixed-rate mortgages maturing in calendar year 2023, banks will need to remain very competitive on mortgage prices in the coming years.

Mott says that because of their reliance on mortgage brokers (who sell about two-thirds of all home loans), banks scrambling to win this business will result in most of the benefits of rising interest rates being passed on to brokers and customers.

He argues that the recent rebound in bank stocks makes the majors look expensive again, trading at a price-to-earnings ratio of 17.2, well above the five-year average of around 14.