Australia: Curve steepening slows before renewed push higher - Westpac

In Australia, the main market themes remain unchanged as the RBA Board Minutes will once again reiterate the “on hold for the foreseeable future” base case and that will continue to support the front end of the curve on any US-led dips, according to analysts at Westpac.

Key Quotes

“That will also support the directionality of the broader 3-10yr curve, which will flatten on US-led rallies and steepen on sell-offs. We continue to hold the view that 80bp is the next target, however a week of consolidation in the outright will test the resolve of those looking for quick gains. A steepener is a crowded trade at the moment, so there is scope for a “clean out” of positions before the upward trend resumes. We would expect those looking to reset or add more risk to steepeners to be targeting 70bp to do so.”

“Cross market spread consolidation: The AU-US 10yr spread begins the week ay +1bp. Our view has been that it will “do a lot of work” around the 0bp level and that is evident in recent price action. It is too early to expect the next re-pricing toward a sustainable inversion to occur this week, however we are very confident that any widening in the spread (likely on a rally in US bonds) should be faded.”

“Futures roll in focus: One intriguing aspect of the market at present is that there is already a tactical focus on the March futures expiry and roll into the June contract. Given that the underlying basket bonds for each contract are changing, the roll on the 3yrs is worth 12bp and the roll on the 10yrs 8bps. That will provide a 4bp “optical” flattening of the 3-10yr spread , and also a narrowing of the 3yr swap EFP as well. Tactical positions based on these outcomes are already being considered. For example, the Mar 3yr swap EFP is attracting payside flows, given that the implied June EFP is back near recent range lows.”

“It is an indication of the current market uncertainties that these considerations are taking place just under a month out from the futures expiry. Historically these trades are entered in the days before and even after the expiry, not weeks ahead of the roll. It is also a function of the very clear direction from the RBA around stable policy conditions for the time being.”