In The AFR today I explain how the major bank "widow-maker" trade, which hammered bears for years as their stock prices soared, is back with vengeance: hedge funds are shorting the majors' stocks and betting on credit risks rising. Excerpt enclosed below: "AA- rated Aussie major bank senior credit default swap (CDS) spreads are now much wider than lower rated organisations like Bank of America, Royal Bank of Scotland, HBOS and Lloyds," a domestic trader said on Friday. "It doesn't make sense – Standard & Poor's has canvassed upgrading the majors' stand-alone credit profiles given they're becoming the best capitalised banks in the world." Asked what was motivating the blow-out in major bank CDS spreads, a foreign trader responded: "Hedge funds have noticed Aussie house prices have rolled over negative 3 per cent year-on-year – there's seemingly a disconnect between the real economy and financial funding costs". This is a classic case of myth becoming reality. House prices have not fallen year-on-year: they're up 7.3 per cent over the 12 months to February 7 according to RP Data. Free (VIEW LINK)
Christopher Joye is Co-Chief Investment Officer of Coolabah Capital Investments, which is a leading active credit manager that runs over $2.2 billion in short-term fixed-income strategies. He is also a Contributing Editor with The AFR.
I wonder if there could there be some logic behind this move by hedge funds?. Last month, a number of the top performing assets were metals, including gold, silver and iron ore. While it is not wise to read too much into such short term fluctuations, there is a possibility that we may be entering the early stages of another commodities boom. My point is, that if there was a resurgence in the resources sector in Australia, the RBA would have no choice but to raise interest rates, and this might cause problems for property valuations in Melbourne and Sydney, as the excessive valuations in these cities seem to imply that property investors have made an assumption that interest rates will stay low over the long term (which of course would not be the case in the event of a new mining boom).