Australia: Rates are in “no-man’s land” - Westpac

AU rates are basically in “no-man’s land” in terms of outright levels and 3yr futures are likely to be a “buy on dips” carry proposition for some time, suggests the analysis team at Westpac.

Key Quotes

“The SoMP’s inflation forecast revision will be supportive of that view. The rhetoric around a long period of steady rates will be the market’s central case for some time to come despite pricing likely to maintain a small degree (20-80% chance) of a hike over next 12 months. The sentiment reflected in that risk reward profile for monetary policy suggests that, at the longer maturities, there will be sellers into any strength on a medium term outlook for higher global yields.”

“The front end revisions post-SoMP steepened the curve by around 3bps and a bear steepener will gain momentum if the US 10yr yield were to move decisively through 2.4% as we head into the December FOMC.”

“Even so, should the AU 3-10yr curve near 80bps, yield-related buying will be encouraged and slow the “beta” with bearish US outcomes, capping the steepening impulse.”

“The AU-US 10yr bond spread is now ~20bps, which is where we expect it to consolidate near term. It was not able to sustain much below those levels earlier in the year. However, the SoMP revision implies there is little reason for a bearish re-widening outside of profit relating selling. It will not be until the relative cash rates in either country actually converge before the longer cross market spreads can trade toward flat.”