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Australian central bank will buy mortgage-backed debt

Section: Daily Dispatches

By Laura Cochrane
Bloomberg News Service
Thursday, September 6, 2007

MELBOURNE, Australia -- Australia's central bank said it will buy debt backed by home loans to add cash to the financial system, after the U.S. subprime credit rout eroded demand for asset-backed securities and drove up interest rates.

The rate banks charge each other for three-month loans fell 15 basis points from yesterday's 11-year high of 7.06 percent after the Reserve Bank of Australia said in a statement today it will buy top-rated bonds linked to mortgage payments. Asset- backed commercial paper and bank bills are also eligible for purchase.

The move increases funds available to banks and supports the market for asset-backed debt in Australia, where credit markets have been roiled by losses related to debt backed by loans to U.S. homeowners. National Australia Bank Ltd., the nation's largest lender, yesterday said an affiliate had been unable to refinance A$6 billion ($4.9 billion) of loans.

"This will put a bit of calm back into the markets and improve the liquidity situation," said Mark Bayley, director of credit and structuring at ABN Amro Holding NV in Sydney.

Australia's lenders depend more on capital markets for funds than other banks in the Asia-Pacific, Moody's Investors Service said in a report. Australia & New Zealand Banking Group Ltd., the third-largest lender, said Aug. 30 profit margins on its loans have narrowed as much as 25 basis points.

The Morgan Stanley Capital International Asia-Pacific Index of shares slid 0.5 percent to 150.44, led by finance stocks. Macquarie Bank Ltd., Australia's largest securities company, dropped on concern losses will widen at its funds investing in high-yielding debt.

The Reserve Bank yesterday left the overnight cash rate unchanged at an 11-year high of 6.5 percent. Central banks typically buy government securities in so-called repurchase agreements, or repos, for a set period to bring money market rates closer to their targets. At maturity, the securities and the cash are returned to the central bank.

The spread for three-month Australian dollar Libor over the RBA's benchmark rate touched 56 basis points yesterday, the widest since February 2000. It has averaged 12 basis points in the past five years. A basis point is 0.01 percentage point.

"Obvious concerns and volatility in the credit markets" triggered the central bank's decision to widen the types of debt it buys in repurchases, said John Broadbent, head of domestic markets department at the Reserve Bank in Sydney. "We need to make sure that what we are dealing in helps the markets."

National Australia Bank moved funding for A$6 billion of loans onto its balance sheet after the unit holding some assets was unable to refinance in the short-term debt market, the Melbourne-based bank told investors in London yesterday.

The rate banks charge each other to borrow in dollar for three months in Singapore rose for a ninth day to 5.7775 percent, the highest since Jan. 3, 2001. A similar benchmark in Hong Kong rose to 4.972 percent, the highest since April 6, 2001.

"The higher cost of funding in the interbank market reflects the banks' reluctance to lend because nobody knows the extent of the subprime problem out there," said Joseph Tan, strategist at Fortis Bank SA in Singapore.

The Bank of Japan refrained from adjusting funds in the financial system today. In Japan, the rate for overnight call loans between commercial banks and other financial institutions in Japan rose to 0.49 percent as of 12:13 p.m. in Tokyo from 0.42 percent yesterday, according to brokerage company Tokyo Tanshi Co. That's still below the BOJ's target of 0.5 percent.

Companies in the Asia-Pacific region are not affected by the credit market rout, according to yesterday's Moody's report. The region's borrowers can continue to rely on bank lending and domestic bond markets, the report said.

"Moody's is seeing no evidence so far of a reduction in the ability or willingness of the banking sector in Asia to lend to corporates," Sydney-based Brian Cahill and Hong Kong-based Clara Lau, wrote in the report.

Australian companies may face rising borrowing costs because they actively tap commercial papers for their funding, they said. The nation's banks rely more on the capital market than other Asian lenders, which have more bank deposits to tap.

Yields on three-month U.S. asset-backed commercial paper rose on Sept. 4 to 6.16 percent, the highest in more than six years, according to data compiled by Bloomberg. In Australia, margins lenders have to pay on the securities have risen up to 20 times the level of a month ago to as much as 40 basis points.

While the Australian dollar Libor rate rose 54 basis points from the end of July until yesterday, the dollar Libor rate climbed 36 basis points to a seven-year high of 5.72 percent

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