Australian iTraxx
The Australian iTraxx Credit Default Swap (CDS) index tracks the performance of Australian corporates and is an indicator of credit risk for investment grade entities. The lower the spread, the lower the perception of credit risk. The charts below show performance over one month and one year. Over the last month, the Australian iTraxx continues to tighten.
Bond market in review
RBA Governor Stevens fronted a Parliamentary committee on 22 February, sounding comfortable with low rates and open to further easing, but not in any rush to act given stimulus in the pipeline.
In Europe, a “risk-off” tone emerged in response to the Italian election non-result, albeit short lived. While politics could derail the recovery in Europe and cast doubt on important reforms, near-term tail-risks look manageable given the tools available to central banks globally to deal with liquidity. Notwithstanding that the Italian election continues to generate market jitters, a suite of Eurozone sentiment surveys all improved for February. The recent pledges by central bank officials in Europe and the US to maintain stimulatory measures have also buoyed market sentiment
The lack of progress on important structural reform is also impacting the US outlook, where “sequester” spending cuts are now underway.
G20 Finance Ministers met during the month and have agreed to avoid a currency war and move toward market determined exchange rates. Participants noted that tail risks to the global economy have receded and financial market conditions have improved.
On 16 March, the Cyprus government agreed on terms for a €10bn support package from the European Stability Mechanism (ESM). The package will require Cyprus to impose an ‘upfront one-off stability levy’ on resident and non-resident depositors in Cypriot banks. Junior bondholders will also be ‘bailed in.’ The losses are credit negative not only for Cypriot bank creditors, but also for other European bank creditors since this is a significant step toward limiting or removing systemic support for bank creditors across Europe.
Credit spreads
The data in the chart below is taken from Bloomberg Fair Market Curves. The credit spreads (over the applicable swap curve) are based on a five year maturity representing the composite credit spread of securities around that maturity for each ratings band.
Spreads at 13 March 2013:
AAA: -51.08
AA: +95.14
A: +124.31
BBB: +220.29
Significant ratings/credit changes over the month
- S&P commented on Australia: “Australia's credit strengths underpin resilience, but downside risks remain”, however "risks appear to be largely mitigated". Key risks to Australia's sovereign rating remain China, household debt, and foreign debt but the agency also positively highlighted the country's high domestic savings, the low debt/GDP, the improving quality of foreign capital flows, flexible macroeconomic policies, resilient financial system and improving household financial risk.
- Fitch Ratings affirmed the ratings of Australia's four major banks. The rating affirmations reflect the Fitch's view of the banks' dominant franchises in Australia and New Zealand, strong and stable profitability, generally robust risk management, solid liquidity management and adequate capitalisation. Offsetting these factors are a structural reliance on wholesale funding, particularly from offshore markets and high household indebtedness in Australia.
- Moody's downgraded its rating on the UK rating, citing the continuing weakness in the UK's medium-term growth outlook that poses a challenge to the government's fiscal consolidation programme, which will now extend well into the next parliament. Moody's stated that there is a risk that the UK government may not be able to reverse the debt trajectory before the next economic shock or cyclical downturn in the economy. This was the first downgrade of the rating since 1978. The downgrade should not have an impact on the rating of the major UK banks.