June quarter developments in short term funding markets
BBSW/OIS over the three months to June 2018
The spread between the Australian Bank Bill Swap (BBSW) and Overnight Indexed Swap (OIS) widened significantly in June 2018, this time to an even greater extent than witnessed around the end of the March quarter. Notably, the one and three-month
BBSW/OIS spreads reached levels not seen since the aftermath of the Lehman Brothers collapse, while six-month spreads were the third highest levels on record.
The March Quarter Episode was Partially US Driven
Back in March, the widening of AUD BBSW/OIS spreads closely followed the widening of USD LIBOR/OIS spreads. The latter was due to several US-centric causes, including but not limited to:
- US tax repatriation by multinational corporates
- Higher volumes of US T-Bill issuance crowding out private sector borrowers
- The unwinding of quantitative easing (QE) by the US Federal Reserve (?)
There were also a range of domestic Australian factors involved in the episode that occurred around the end of the March quarter.
For more details, please refer to our earlier paper published in April 2018, A Primer on Recent Developments in Short Term Funding Markets.
At the time, we believed the widening of BBSW/OIS would diminish as several one-off factors subsided. This played out as predicted until mid-May, when we saw the re-emergence of several domestic factors that pointed to BBSW/OIS spreads widening
at the end of June.
Something unique was and is happening within the Australian funding markets to drive these spreads to levels normally only seen during times of extreme crisis.
The June Quarter Causes Were Domestic in Nature
To borrow a financial markets cliché, we think this time is different. USD LIBOR/OIS spreads began narrowing in May. However from mid-May, AUD BBSW/OIS spreads diverged from their USD equivalent, INVESTMENTS widening to levels even higher
than what was observed in March while LIBOR/OIS remained stable.
Clearly something unique was and is happening within the Australian funding markets to drive these spreads to levels normally only seen during times of extreme crisis.
GRAPH 1 - BBSW/OIS HAS REACHED CRISIS LEVELS
GRAPH 2 - BBSW WIDENING WHILE USD LIBOR REMAINS STABLE
Source: ASX, Bloomberg
GRAPH 3 - DEPOSIT AND LOAN GROWTH
Source: APRA, Bloomberg