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Hi Paul,
I have some capital notes (CBAPE) and was wondering what influences the BBSW?
If RBA increase interest rates, does the BBSW increase by a similar amount? If not then I imagine the value of the capital notes would decrease as interest rates increase so would contemplate selling prior to any interest rate hike.
A: Thanks for the question.
BBSW is the Bank Bill Swap Rate – an indicator rate set at 10.00am each morning representing the mid-rate where 90 day bank bills are trading. There are also rates for bills of 30 days, 60 days and 180 days maturity.
The biggest impact on 90 day bank bills is the RBA cash rate. The RBA cash rate is essentially the rate that banks lend money to each other overnight, or invest their surplus liquid funds with the RBA. Because investing in bank bills is an alternative to investing surplus funds with the RBA, and the RBA only reviews the cash rate every 30 days, the 90 day BBSW rate will tend to be pretty close to the RBA cash rate. If however the market starts to expect that the RBA may raise its cash rate, then the 90 day bank bill rate will generally rise in anticipation of this and the gap between the BBSW rate and the actual cash rate will widen. Conversely, if the market expects the cash rate might fall, the 90 day BBSW rate will also fall.
Capital values of notes such as CBAPE will generally not be impacted by a change in BBSW or a change in the RBA cash rate – because all are established on the basis of a margin over BBSW, irrespective of what the actual BBSW is.
I hope this helps
