Australia to Cease Mortgage-Bond Buys After Market Revival
The cost of issuing residential mortgage-backed securities has recovered since the credit freeze in 2008 that prompted the creation of the government’s RMBS program, Swan said in a speech today at the Bloomberg Australia Economic Summit in Sydney. Although it doesn’t plan new purchases, the government won’t sell the securities it owns in the near future, he said.
“We always said the program would have a finite life,” Swan said when answering questions after the speech. “What we want to see is a healthy, competitive, securely operating market. That’s what we’ve got.”
Offerings of housing-backed notes are booming amid a global credit rally, with Commonwealth Bank of Australia and Westpac (WBC) Banking Corp. leading issuers in pricing A$8.21 billion ($8.63 billion) of RMBS last quarter, the most since the three months ending June 2011. Australian home prices are rising as the economy responds to 1.75 percentage points of interest rate cuts in the 14 months through December.
“Investors have a renewed sense of confidence and appetite for the asset class,” Swan said in his speech. “Pricing is now significantly better than for most of the last five years.”
The Australian Office of Financial Management, which administers the RMBS program, has spent A$15.5 billion of its A$20 billion budget, according to information on its website. The program aimed to spur competition in the nation’s home loan market by helping smaller lenders fund themselves.
Swan said the government has no plans to use the remaining funds left in the RMBS program. The Treasurer has been forced to back away from a pledge to return the budget to surplus this fiscal year as tax revenues plunged.
Investors outside Australia and New Zealand took 30 percent of Commonwealth Bank’s A$2.54 billion offering in February, a person familiar with the matter said at the time. Australia’s largest lender priced the top portion of the deal at 80 basis points more than swaps, the narrowest spread since 2007 on notes with a similar weighted average life, data compiled by Bloomberg show.
Bendigo & Adelaide Bank Ltd. (BEN), ING Bank Australia Ltd. and Resimac Ltd. are among the other issuers who have sold mortgage- bonds in Australia this year, Bloomberg data show.
Smaller banks will likely benefit from improving RMBS sales as they have less access to bond markets than the major banks, the central bank said in its semi-annual financial stability review on March 27.
While the Australian government’s funding arm has stood ready to help, it hasn’t bought RMBS since Suncorp-Metway Ltd. sold A$17.5 million of notes to the agency at the end of August, according to the AOFM’s website. The government has since pledged support for four transactions, but demand from investors removed the need for the sovereign’s assistance.
“The fact that they hadn’t participated since August and they’d sold a few deals was adding confusion,” said David Goodman, Westpac’s head of global capital markets strategy worldwide. “This announcement clears it up. They’ve got a big portfolio, they think the market’s standing on its own feet and they’re not going to be selling that portfolio any time soon and undermining the recovery.”
Ready to Respond
The AOFM has helped 67 different deals, according to Swan.
“We’ll continue to monitor the market and we’re ready to respond if market conditions were to take a dramatic turn for the worse,” he said in the speech.
Swan’s bid to promote the government’s economic credentials is being damaged by lower prices for Australia’s resources and a strong local currency that’s curbing tax receipts. That prompted him in December to abandon a pledge to return to a surplus in the May 14 budget.
Swan, who has been Treasurer since the Labor government was elected in 2007, also said in his speech that Australia is continuing efforts for changes to the global financial system to avoid a potential repeat of the subprime crisis and its knock-on effects.
“It’s appropriate that after a global financial crisis, we find global solutions to the problems that caused it,” Swan said. “That’s why we’re working through the G-20, the Basel Committee and the Financial Security Board -- with other like- minded nations like Canada and Korea -- to get balanced outcomes on the new agenda for global financial reform.”
The Treasurer affirmed his commitment to the so-called four pillars policy which prevents the country’s largest lenders from buying each other. During the subprime crisis of 2008, the government was under “growing pressure” to abandon the law and allow takeovers, Swan said in the speech, without saying where the coercion originated from.
“Preserving competition wasn’t just about supporting smaller lenders, it was about maintaining the competitive pressures on the big four,” Swan said. “Not only is it hugely important for banking competition, but it wouldn’t be prudent to have the soundness of our banking system resting on the strength and risk management skills of three banks rather than four.”
Commonwealth Bank, Westpac, Australia & New Zealand Banking Group Ltd. (ANZ) and National Australia Bank Ltd. reported A$11 billion combined profit for their latest six-month results, little changed from the previous half, the RBA said March 27.
Swan also underscored the strength of the Australian financial system, pointing to the country’s growing pool of pension savings. He last week announced plans to curb tax concessions for wealthy Australians saving for their retirement amid government efforts to plug the budget deficit.
“Australia’s A$1.5 trillion superannuation system is one of our unique national strengths which sets us apart from the rest of the world,” Swan said. “Together with our A$3 trillion banking system, it helped get capital to where it was needed most during the GFC to support the economy.”
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