MURRAY This has been exercising our minds for a while. The banks have been absent, but they are a mainstay of the market and their FRNs [floating-rate notes] are some of the most liquid credit instruments around. I expect they would be well represented in most investors’ portfolios. One question we have is on senior spreads, which are very tight. The only issuance we have really seen in size has been subordinated debt. To what extent have investors filled their bank allocation with sub debt – particularly as we have all been chasing yield – and how much capacity do local investors have to take senior paper now?

DIAMANT The spectrum of investors investing in major-bank subordinated debt has grown, particularly over the last 18 months. It is a far more liquid space, especially in secondary, with offshore investors – in New Zealand and Asia specifically – as well as domestic accounts.

The actual allocation to major banks, whether it is across senior or subordinated debt, will certainly weigh on pricing. We are yet to see the cleansing event of new benchmark Australian dollar primary deals from the major banks to reweight spreads or reshape the curve. The movement in bank senior spreads is probably no more than 10 basis points since the CLF [committed liquidity facility] announcement on September 10.

When we see the next wave of Australian dollar major-bank supply, I think we will see the real re-evaluation come into play with switching and an uptick in secondary activity. We haven’t yet seen ALM [asset-liability management] accounts exiting alternative liquid assets positions in meaningful size.

BUTCHER We are working through the consequences of the CLF decision at the moment. There is a relative consideration about spreads and carry, and there is also a slight difference in products between RMBS [residential mortgage-backed securities] and senior-unsecured, with the latter a bit more liquid in the secondary market.

There has been some talk about whether APRA [the Australian Prudential Regulation Authority] could look at other products to be included as HQLAs [high-quality liquid assets] – so-called ‘HQLA2’. I think this is a low probability but it could be interesting going forward.

BARRINGTON We will once again be much more exposed to offshore credit markets, given the banks’ greater focus on offshore markets for wholesale funding – as we have seen with their recent US dollar and euro deals. I think this will result in increased volatility in cross-currency markets, especially as we move into this transition period for the CLF and term-funding facility.

Semi-government spreads tightening and the cross-currency basis widening could create opportunities for SSA [supranational, sovereign and agency] issuance. This will provide opportunities, particularly for real-money investors with more discretion in their government and semi-government holdings.

Since the CLF announcement, the credit market has probably been at its quietest. Although major-bank spreads have been marked wider, very little has been traded in secondary and domestic primary supply has been muted as issuers focus on offshore markets.

In comparison, we have seen a significant increase in client activity across cross-currency and single-basis markets, and also in semi-government paper – the latter responding to increased demand-and-supply dynamics.

RAVENSCROFT All the points raised on this topic really circle back to the themes discussed at the start of this conversation on relative-value opportunities and, in particular, to Richard Yetsenga’s point about the likelihood of a wild ride over the next 12 months.

One thing to consider is that higher credit spreads do not automatically equal lower liquidity. It can be quite the opposite, especially if we are talking about supply-driven spread widening. The story of 2022 is going to be finding new pricing levels, and it is going to be a more interesting journey than the 12-month grind we had down to current levels.