News

Last Thursday the Greek parliament approved the EU bailout programme and the conditions attached to it. As a result, the ECB increased emergency lending to Greek banks and EU finance ministers approved a new €7bn bridging loan to Greece, allowing the country to have enough funds to make its scheduled payment to the ECB on 20 July and clear its outstanding loan to the IMF which it missed at the end of June. One potential stumbling block is the approval required of the German parliament in opening negotiations for the implementation of a third bailout package but informal polling suggests the majority of German MPs are in favour.

Following on from last week’s international capital comparison study, APRA has announced an increase in risk weightings for residential mortgages for the big four banks and Macquarie. APRA has determined that the average risk weighting across these banks must be at least 25% (compared to approximately 16% at present). This is seen as an interim measure until the Basel III rules are finalised and will come into effect on 1 July 2016. APRA estimates the changes will necessitate the banks increasing their minimum capital requirements by approximately 80bps in the next 12 months and Morgan Stanley suggests this could be around $12.5bn in fresh capital. CBA will be watched closely for comment as it will be the first bank to report its earnings in August. The move is seen not only as reducing the risk of a systemic crisis based on mortgage risk but as a win for the smaller regional banks in their ability to compete on mortgage products. The report can be found here.

On Tuesday the AOFM held the second scheduled auction of RMBS bought by the Federal government during the GFC in order to inject liquidity into the banking system. The second of several RMBS auctions, bids were accepted for approximately $260m of the $3.2bn in original face value terms on offer. The amount sold is even less than the June auction, both in absolute size and in percentage terms and is clearly a concern to the Federal government as it seeks to sell the RMBS at a ‘fair’ price. The next auction will be held in August.

There were three AOFM tenders last week and the coverage ratios may indicate participants’ view of the future yield curve. Early in the week $900m of the April 2026 were auctioned and the coverage ratio was a fairly subdued 2.2 times. At the end of the week, $800m of the November 2020 line was sold and the coverage ratio was nearly double that of the April 2026. A similar pattern was seen in the previous week.

In a speech last week, the BoE governor signalled the start of rising official interest rates in the UK is likely to begin around the end of 2015. Mark Carney, the former chief of the Bank of Canada, said the decision to raise rates would need to be addressed “by the turn of this year” but in doing so he made several qualifications; “headwinds to growth and inflation remain”, important parts of the UK economy were running below their historical averages, the pound has risen appreciably and fiscal policy was tightening, all of which detract from inflationary pressures. He then addressed the likely trajectory of UK rate rise by saying the path to “more normal levels…will be longer and shallower than those of the past” and interest rate rises would proceed to a level”about half as high as historical averages.”

Last Tuesday the Queensland government tabled its 2015/2016 budget forecasting a $962m operating surplus in 2014/2015 and a $1.2bn surplus in 2015/2016. The 2015/2016 borrowing requirement will be $6.5bn or about 8% higher than the 2014/2015 requirement of $6bn, assuming a $1bn inflow as a result of budget measures.

Gross Qld govt debt per person

Gross state product is forecast to grow at 4.5% which is up from the previous year’s recorded 2.3% while expenditure is expected to increase by 4.3%. Borrowing will fall from $43.2bn in 2014/15 to $38.1m but this is mostly from shifting debt to government-owned businesses. Pressure on the level of state debt will be eased by a suspension of defined benefit contributions for public servants, which will go some way towards offsetting an expected $3bn reduction in the amount to flow from mining royalties.

Queensland treasurer, Curtis Pitt said S & P and Moody’s “initial response was one of no change”. Queensland currently has a AA+ rating from S&P and Aa1 rating from Moody’s.

The UK’s CPI was released last Tuesday and it was unchanged in the year to June and slightly down on expectations. The result compares with a 0.1% increase to May. Annual “core” CPI fell back to 0.8% from the 0.9% increase recorded in May.

Last week the Adelaide-based Angas Fixed Interest Debenture Fund ordered a freeze on redemptions for at least 18 months. The freeze follows a Federal Court order in April after the trustee to the fund commenced legal proceedings against Angas. A meeting of debenture holders has been called for in August 2015 where Angas will put forward a proposal to run down the loan portfolio and make scheduled repayments to holders.

Last week the BoE chief’s former home, the Bank of Canada, lowered its benchmark interest rate to 0.50% from its previous 0.75%. The change was expected as Canadian GDP is likely to be negative for both the June and March quarters, meeting the technical definition of an economy in recession. The cut is the second decrease this year and quite well flagged, unlike the first rate change in January which shocked the Canadian market.

Toronto Dominion (“TD”) priced an 18 month note last week in its debut local issue of its own debt. TD has been an active arranger for other parties in the past but this is its first time on its own account. TD senior debt has a AA- rating from S& P and a Aa1 rating from Moody’s and it will be issuing $350m of the floating rate notes.