Last Thursday the ANZ gave their second update in five weeks on their credit status by announcing a further increase of $100 million in bad & doubtful debts for the first half of 2016 (1H16), to a little over $900 million. This was attributed to a small number of Australian and multi-national resource related exposures. Westpac also commented that it may also increase provisions in its institutional business and confirmed that they are also starting to observe some consumer loan stress (primarily in the mining states of Western Australia and Queensland), flagging a $25 million increase (10% increase on the prior corresponding period) in provisions. Whilst these numbers are relatively small and manageable for both the ANZ and Westpac, investors reacted with the ANZ, CBA, NAB and WBC share prices all down (5.21%, 2.45%, 3.53% and 4.58% respectively). Investors continue to be concerned as the reduction in profitability will place increased pressure on the ability to maintain dividends. To add to the credit tightening, the ANZ has followed the other three major banks in cracking down on loose lending practices applied by mortgage brokers. This includes taking a tougher line when assessing borrowers’ living expenses and discounting non regular income such as bonuses and overtime when making their serviceability calculations. These changes are expected to come into effect from the 4th April. As the four major banks have an estimated 78% market share of the Australian home loan market, the tightening of lending standards should start to have an impact on the housing market over the second half of 2016. Looking forward, the CBA’s PERLS VIII (ASX: CBAPE) list this week on the 31st March. Positively for the hybrid markets, the CBA is capping new money into the issue at $650 million, with the remaining $260 million of the $910 million issue coming from existing PERLS III (ASX code: PCAPA) holders. This means that only 22.3% of PCAPA investors decided to roll into the new security. Out of interest, the PERLS VII issue (ASX: CBAPD) rallied after the announcement of PERLS VIII from 5.81% to a low of 5.20% on the 19th February, before closing at a trading margin of 5.52% on the 24th March. Similarly, the ANZ Capital Notes (ASX: ANZPD) (that have an expected call date a month before the CBAPE’s) closed with trading margins of 5.81%, 5.30% and 5.42% on these same three dates. Therefore, it is not unreasonable to expect the CBAPE’s to list with a trading margin between 5.30% – 5.50% (assuming no further rally this week). We expect increased primary market activity in the coming weeks as ANZ and Westpac will most likely announce replacements for their WCTPA and ANZPA securities (expected call dates of 30th June 2016 and 15th December 2016 respectively). Click below for Interactive Charts Chart 1: Bloomberg AUSBond Composite Index (Monthly) Chart 2: Bonds vs Equities 2014/15 (Monthly) Interest Rates Bond market activity in Europe remains active with primary market issuance higher than normal but this week markets are waiting to hear Janet Yellen (Federal Reserve Chairman) speak (Wednesday Australian time). US employment data is due on Friday with the data trend being an important factor that in the Fed’s interest rate policy. The RBA remains confident in their neutral position but the recent strength in the currency will likely lead to further “jawboning” and if this fails we may see further cuts to rates. Given the resilience of recent economic data we expect the cash rate will remain at 2.00% in the RBA’s meeting next Tuesday. In February 2015, the 10-year bond yield hit an all-time low of 2.27% before lifting to highs near 3.15% on 11 June 2015. In early November 2015 there was a progressive increase in yield from ~2.60% to a high of 2.99%. Since mid-December the flight to quality meant the 10-year yield gave back the changes in Q4 2015 and on 1 March 2016 hit a 6 month low of 2.35%. In the past few weeks we have seen a sharp bounce back up but the yield is now consolidating around 2.60% (current 2.57%). The 3-year bond has followed a similar pattern and broke out of its recent yield range (1.90 – 2.10%) in November / December 2015 reaching a high of 2.18% on 7 December 2015. It retraced back to a short term low of 1.70% but then jumped back up to 1.97% in the past weeks. On 24 March 2016, the ASX 30 Day Interbank Cash Rate Futures April 2016 contract was trading at 98.030 indicating a 7% expectation of an interest rate decrease to 1.75% at the next RBA Board meeting (down from 12% previous week).