Question of the Week

Questions of the Week

Co-founder of the Switzer Report
Print This Post A A A

Question: I have some capital notes (CommBank PERLS VIII Capital Notes - CBAPE) and was wondering what influences the BBSW? If the Reserve Bank increases 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 I would contemplate selling prior to any interest rate hike.

Answer (Paul Rickard): BSW 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.

Also from this edition