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Got Bonds
#202
cobran20 
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Posted 07 March 2012 - 10:02 PM
cobran20, on 07 March 2012 - 07:55 AM, said:
Cost of funds rising?
Evidence shows banks' funding stance on interest rates was correct
Quote
Predicting the setting for the banks' standard variable housing loan interest rate used to be simple. Before the subprime crisis in the US and the subsequent GFC, the variable rate was simply the RBA target overnight cash rate plus 1.8% or, in “bankspeak”, a spread of 180 basis points.
However, since January 2008, the spread has been getting larger, now standing at 315 basis points. Each increase in the home loan rates by the banks that has been greater than the RBA monetary policy move has been explained away as being due to increased funding costs, particularly the cost of raising funds overseas. This has not been received well by a sceptical public, particularly when a recent Societe Generale report claimed that funding costs had actually declined.
So where do the banks raise the funds to issue loans? Has the composition of this funding changed since 2007, and has the cost increased or decreased?
Traditionally, banks loan out the deposits they receive, and the cost is simply the interest they pay out on the deposits. The difference between the loan rate and the deposit rate of interest, the interest margin, can be thought of as their profit margin. However, Australian banks do not get all their loan funding from deposits, the amount of deposits is not large enough to satisfy our demand for credit. So Australian banks have to borrow money from elsewhere to be able to lend out. This can either occur here in Australia or in the international financial markets. This has been particularly good for Australians as funding sources from debt sources, particularly short term debt, has generally been cheaper than deposit sources.
Sources of bank funding RBA Chart Pack
As we can see in the graph above, prior to the onset of the GFC, the major sources of funding were deposits (38%), and short term debt (33%). The loss of liquidity in the short term debt market due to the GFC forced the banks to change their funding composition to sources that are more expensive. Funding from deposits now take up about 52% of the total, short term debt funding has fallen to 20%, and long term debt funding has increased to 20%.
So, how much more expensive? Since mid-2007, the average the cost of deposits have risen about 130 basis points relative to the cash rate, and long-term debt cost rising about 100 basis points on average relative to the cash rate. The cost of short-term debt has generally not changed relative to the cash rate. Most of these changes occurred in late 2008 and 2009, and until about August 2011 the cost of the banks' debt funding cost have moved largely in line with the cash rate.
Australian Bond Spreads RBA Chart Pack
However, with the onset of the European debt crisis and the possibility of Greece defaulting on its debt, costs have again increased relative to the cash rate. As we can see in the Australian bons spread graph, the spreads on AA domestic bonds increased from about 120 basis points to over 200 basis points, with spreads in the overseas markets moving somewhat higher.
This means although the cash rate had fallen, the increase in the risk spreads on debt funding effectively eliminated that reduction in cost, particularly when it appears that approximately 60% of new long term debt funding was sourced from overseas (according to RBA bond issuance statistics) in the last half of 2011.
Similarly with deposit funding, since August 2011 the cost of deposits has risen about 25 basis points relative to the cash rate.
Combining these factors, it implies that overall cost of funding for the banks did increase over the last half of 2011. Glenn Stevens did note this in his March monetary policy media release that “capital markets are again supplying funding to corporations and well-rated banks, albeit at costs that are higher, relative to benchmark rates, than in mid 2011”.
So where are bank funding costs are likely to move over the next year? It is perhaps instructive to take a look at the spread between the banks average discounted variable home loan rate and the average “specials” deposit rate rather than just focus on how higher the variable home loan rate is over the cash rate. While not exact, it is a good proxy, giving an indication as to whether banks costs have increased or decreased.
RBA Statistical Tables F4 and F5
According to the above graph, prior to the GFC the “normal” average margin was 157 basis points. Post GFC, the average is 100 basis points, so banks' cost of funding has been higher post GFC. We can also see that banks' costs increased again from the middle of last year and only just starting to decrease again.
However, the current margin of 135 basis points is still 20 basis points lower than normal pre-GFC levels. This suggests that with the current concerns over whether the Greek bailout will work, it is quite likely that we will see further adjustments upwards in loan rates or reductions in the deposit rate relative to the cash rate over the next year.
However, since January 2008, the spread has been getting larger, now standing at 315 basis points. Each increase in the home loan rates by the banks that has been greater than the RBA monetary policy move has been explained away as being due to increased funding costs, particularly the cost of raising funds overseas. This has not been received well by a sceptical public, particularly when a recent Societe Generale report claimed that funding costs had actually declined.
So where do the banks raise the funds to issue loans? Has the composition of this funding changed since 2007, and has the cost increased or decreased?
Traditionally, banks loan out the deposits they receive, and the cost is simply the interest they pay out on the deposits. The difference between the loan rate and the deposit rate of interest, the interest margin, can be thought of as their profit margin. However, Australian banks do not get all their loan funding from deposits, the amount of deposits is not large enough to satisfy our demand for credit. So Australian banks have to borrow money from elsewhere to be able to lend out. This can either occur here in Australia or in the international financial markets. This has been particularly good for Australians as funding sources from debt sources, particularly short term debt, has generally been cheaper than deposit sources.
Sources of bank funding RBA Chart PackAs we can see in the graph above, prior to the onset of the GFC, the major sources of funding were deposits (38%), and short term debt (33%). The loss of liquidity in the short term debt market due to the GFC forced the banks to change their funding composition to sources that are more expensive. Funding from deposits now take up about 52% of the total, short term debt funding has fallen to 20%, and long term debt funding has increased to 20%.
So, how much more expensive? Since mid-2007, the average the cost of deposits have risen about 130 basis points relative to the cash rate, and long-term debt cost rising about 100 basis points on average relative to the cash rate. The cost of short-term debt has generally not changed relative to the cash rate. Most of these changes occurred in late 2008 and 2009, and until about August 2011 the cost of the banks' debt funding cost have moved largely in line with the cash rate.
Australian Bond Spreads RBA Chart Pack
However, with the onset of the European debt crisis and the possibility of Greece defaulting on its debt, costs have again increased relative to the cash rate. As we can see in the Australian bons spread graph, the spreads on AA domestic bonds increased from about 120 basis points to over 200 basis points, with spreads in the overseas markets moving somewhat higher.
This means although the cash rate had fallen, the increase in the risk spreads on debt funding effectively eliminated that reduction in cost, particularly when it appears that approximately 60% of new long term debt funding was sourced from overseas (according to RBA bond issuance statistics) in the last half of 2011.
Similarly with deposit funding, since August 2011 the cost of deposits has risen about 25 basis points relative to the cash rate.
Combining these factors, it implies that overall cost of funding for the banks did increase over the last half of 2011. Glenn Stevens did note this in his March monetary policy media release that “capital markets are again supplying funding to corporations and well-rated banks, albeit at costs that are higher, relative to benchmark rates, than in mid 2011”.
So where are bank funding costs are likely to move over the next year? It is perhaps instructive to take a look at the spread between the banks average discounted variable home loan rate and the average “specials” deposit rate rather than just focus on how higher the variable home loan rate is over the cash rate. While not exact, it is a good proxy, giving an indication as to whether banks costs have increased or decreased.
RBA Statistical Tables F4 and F5
According to the above graph, prior to the GFC the “normal” average margin was 157 basis points. Post GFC, the average is 100 basis points, so banks' cost of funding has been higher post GFC. We can also see that banks' costs increased again from the middle of last year and only just starting to decrease again.
However, the current margin of 135 basis points is still 20 basis points lower than normal pre-GFC levels. This suggests that with the current concerns over whether the Greek bailout will work, it is quite likely that we will see further adjustments upwards in loan rates or reductions in the deposit rate relative to the cash rate over the next year.
#203
cobran20
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Posted 14 March 2012 - 08:44 AM
cobran20, on 04 February 2012 - 02:17 AM, said:
I'll be surprised if Ben doesn't get a rude surprise in the next few months!
yields rising, stock markets rising ... is the money flowing out of bonds and into stocks?
#204
cobran20
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Posted 16 March 2012 - 10:10 AM
cobran20, on 04 February 2012 - 02:17 AM, said:
I'll be surprised if Ben doesn't get a rude surprise in the next few months!
Cost of mortgage finance rising here as well!
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#207
Mr Medved
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Posted 30 March 2012 - 10:02 AM
WSJ: Fed Buying 61 Percent of US Debt
http://www.moneynews...03/28/id/434106
The Federal Reserve is propping up the entire U.S. economy by buying 61 percent of the government debt issued by the Treasury Department, a trend that cannot last, Lawrence Goodman, a former Treasury official and current president of the Center for Financial Stability, writes in a Wall Street Journal opinion article published Wednesday.
Last year the Fed purchased a stunning 61 percent of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis," Goodman writes.
Goodman also warns that U.S. economy and markets are “at risk for a sharp correction” if conditions aren’t “normalized.”
"This not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits."
More in the link.
http://www.moneynews...03/28/id/434106
The Federal Reserve is propping up the entire U.S. economy by buying 61 percent of the government debt issued by the Treasury Department, a trend that cannot last, Lawrence Goodman, a former Treasury official and current president of the Center for Financial Stability, writes in a Wall Street Journal opinion article published Wednesday.
Last year the Fed purchased a stunning 61 percent of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis," Goodman writes.
Goodman also warns that U.S. economy and markets are “at risk for a sharp correction” if conditions aren’t “normalized.”
"This not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits."
More in the link.
#208
Solomon
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Posted 30 March 2012 - 12:40 PM
Mr Medved, on 30 March 2012 - 10:02 AM, said:
WSJ: Fed Buying 61 Percent of US Debt
http://www.moneynews...03/28/id/434106
The Federal Reserve is propping up the entire U.S. economy by buying 61 percent of the government debt issued by the Treasury Department, a trend that cannot last, Lawrence Goodman, a former Treasury official and current president of the Center for Financial Stability, writes in a Wall Street Journal opinion article published Wednesday.
Last year the Fed purchased a stunning 61 percent of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis," Goodman writes.
Goodman also warns that U.S. economy and markets are “at risk for a sharp correction” if conditions aren’t “normalized.”
"This not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits."
More in the link.
http://www.moneynews...03/28/id/434106
The Federal Reserve is propping up the entire U.S. economy by buying 61 percent of the government debt issued by the Treasury Department, a trend that cannot last, Lawrence Goodman, a former Treasury official and current president of the Center for Financial Stability, writes in a Wall Street Journal opinion article published Wednesday.
Last year the Fed purchased a stunning 61 percent of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis," Goodman writes.
Goodman also warns that U.S. economy and markets are “at risk for a sharp correction” if conditions aren’t “normalized.”
"This not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits."
More in the link.
I know I'm stupid, but if this is even fractionally true, it is total lunacy.
I don't even know how this can happen.
It's almost like drinking my own urine.
#209
cobran20
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Posted 03 April 2012 - 10:02 AM
cobran20, on 14 March 2012 - 08:44 AM, said:
yields rising, stock markets rising ... is the money flowing out of bonds and into stocks?
The US long term yields attempted to rise above last October's high and have been pushed back. If the bulls succeed, Ben will not be pleased!
#210
cobran20
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Posted 03 May 2012 - 03:33 AM
cobran20, on 03 April 2012 - 10:02 AM, said:
The US long term yields attempted to rise above last October's high and have been pushed back. If the bulls succeed, Ben will not be pleased!
Those yields are not holding up to well. So how low can they go? The answer may not be zero, but negative (see link1 and link2). I noticed that Hewson is suggesting that the RBA should set the official rate at 2%. Perhaps Stevens can trump that and go ZIRP!
#211
tor
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Posted 03 May 2012 - 03:38 AM
If one were to say that bond yields go up when the US prepares for war (which I think is a loose interpretation of the graph above) then that is fine but it might be because the bond holders think the US will win the war which might be why the bonds didn't work for Iraq /Afghanistan?
My memory is stirring vague napoleonic / goldman sachs associations.
My memory is stirring vague napoleonic / goldman sachs associations.
#213
cobran20
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Posted 03 May 2012 - 04:46 AM
tor, on 03 May 2012 - 03:38 AM, said:
If one were to say that bond yields go up when the US prepares for war (which I think is a loose interpretation of the graph above) then that is fine but it might be because the bond holders think the US will win the war which might be why the bonds didn't work for Iraq /Afghanistan?
My memory is stirring vague napoleonic / goldman sachs associations.
My memory is stirring vague napoleonic / goldman sachs associations.
Rather than GS, perhaps Rothschilds?
