Australia: Yellen’s speech is critical for cross market relativities - Westpac

Research Team at Westpac, suggests that last week’s Australian outright price action can broadly be defined as one of consolidation for global bonds within their trading ranges.

Key Quotes

“From a cross market spread perspective, neither the RBA Minutes nor the important monthly labour data in Australia, nor the FOMC minutes and significant Fed speakers was able to provide a catalyst for markets to re-price in any meaningful way.

With that as the backdrop, it would appear that this week’s Jackson Hole speech by Fed Chair Yellen will be the key determinant of sentiment and momentum in markets. Until then we are playing a waiting game. Having said that, in weeks in which volatility is relatively low, the yield seeking thematic gains greater credence.

As a result, AU bonds have been an outperformer over the week, with the AU-US 10yr bond spread having narrowed from 38bp on Monday morning to 32bp by Friday morning. Should Yellen provide a hawkish backdrop, which drives 10yr UST yields higher, then the spread is likely to stay revisit the low-30’s and test a breach of that key levels.

Of the two alternatives – either a rally on a dovish statement or a material push higher in yields on a re-evaluation of the timing of the next rate hike – the former is relatively neutral for the spread within the recent ranges, while the latter would probably see the spread widen slightly before divergent monetary policies again cap the widening impulse.

Overall, our bias is to await opportunities to reset narrowers around the 50bp level.”