Westpac Banking Corp. (WBC), Australia’s second-biggest lender by market value, expects an increase in investor demand for debt products linked to the consumer-price index as risks grow that central banks will stoke inflation.
Westpac, which participates in public markets for government securities linked to the CPI, is also active in arranging private transactions to help clients manage their exposure to inflation, Tony Masciantonio, the lender’s head of debt markets, said yesterday in an interview in Sydney.
Record demand this week at a sale of federal bonds pegged to consumer price changes underscores the Reserve Bank of Australia’s estimates that a weakening of the local currency will spur inflation. Westpac’s push to build CPI-linked capability is part of a broader effort to expand its debt business in Australia and in Asia.
“We’ve got lots of government, infrastructure, property clients who have CPI (AUCPIYOY) exposure, and we have institutional and other clients who want to invest in that exposure,” said Masciantonio. “Building that capability makes absolute sense.”
While inflation has so far been benign, there is a possibility that global policy makers could unintentionally spark price rises following unprecedented levels of monetary easing, he said. It doesn’t take much for people to start thinking about the prospect of accelerating inflation, he said.
The RBA has already cut its benchmark rate to a record low 2.75 percent and traders are betting on at least one more quarter-point cut by the end of 2013, according to swaps data compiled by Bloomberg. In the U.S., the Federal Reserve is contemplating a possible tapering of the quantitative easing program that has helped push down borrowing costs.
Investors bid for 8.98 times the A$200 million ($183 million) of Feb. 21, 2022 in federal inflation-linked bonds offered on July 16, the highest bid-to-cover ratio for any notes in data from the Australian Office of Financial Management dating to 1982.
Westpac is the top arranger of bonds so far this year in Australia, having trailed Australia & New Zealand Banking Group Ltd. for the past three years, according to data compiled by Bloomberg.
“For us absolutely Australia and New Zealand is our core market and we want to be the top player in this market,” Masciantonio said. “It takes a while to build momentum and how it has fallen our way year to date is pretty pleasing.”
The bank has added staff in Australia including John Chauvel, who was hired this year to run Westpac’s debt capital markets business. It also increased its presence in Asia, quadrupling the size of its Singapore dealing room and adding staff from trading to origination and sales.
Westpac is also assessing how to help clients raise debt in the so-called Term Loan B market in the U.S., said Masciantonio. If it went ahead with such transactions, the bank would operate selectively as borrower demand is currently curbed by market volatility and the high hedging costs of raising loans offshore, he said.
“Like I suspect all the major banks are, we are absolutely looking at Term Loan B because it is a competitive threat to us servicing our existing clients,” he said.
In the U.S., Australian companies have borrowed over $9 billion since October last year, when Fortescue Metals Group Ltd. (FMG), the nation’s third-biggest iron ore miner, raised $5 billion in the Term Loan B market, replacing bank facilities on looser terms. The lenders are typically U.S. institutional investors rather than banks.
“If that market became massive like the U.S. private placement market, then we would have to do something more meaningful,” said Masciantonio. “It really depends how that market evolves and how much our clients use it and how much of a competitive threat it is.”
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