Daily Commentary BY THE CURVE TEAM –

Market Activity Abounds

23rd of February, 2021

A raft of market activity and updates, including bank acquisitions, bond issues and adjusted ratings outlook could vastly change the investing environment.

Bank of Queensland’s acquisition of ME Bank was one such update yesterday. It will give BOQ much more clout to compete particularly with the majors, and also strengthens ME, which had its ratings outlook updated by S&P.

This follows NAB’s recent acquisition of 86400, a neobank. Despite their acquisition, NAB was put on a negative outlook watch by S&P yesterday.

This update is significant, as a primary motivator for it was the anticipated fall of the Australian Government’s AAA credit rating. The government’s spending splurge during covid has hit the financial position of the government.

A downgrade to the government could reduce demand for our bonds/debt, which could increase yields. A downgrade to NAB, only one of four domestic AA- banks, would instantly put many investors in breach of their investment policies and APRA imposed limits.

S&P indicated that the possibility of these occurring is still at least over a year away. Currently, there is already a swing in yields at the back end of the curve.

Australian government ten year yields were up 18 points yesterday to finish above 1.60%. Optimism for growth and inflation given the vaccine rollout and accommodative fiscal and monetary policy are the key drivers for the rise.

It already appears to have influenced recent bond issues. Yesterday, UBS took orders for a 5 year senior note, and the fixed rate increased from an indicative 1.10% to 1.30%.

Last week, Suncorp similarly issued a 5 year note and had no allocation for its indicative 0.95% fixed rate. It could indicate investors will continue to be compensated more for longer fixed terms given the recent lift in yields.

Josh Stewart

Associate - Money Markets