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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
AUSSIE SWAPS
With terminal rate pricing pushing substantially higher since the RBA’s hawkish shift at the February policy meeting, notwithstanding the more recent move from 4.35% to 4.14%, it is not surprising that the 3/10 cash curve has flattened.
Fig. 1: RBA-Dated OIS – Terminal Rate Pricing
Source: Bloomberg / MNI - Market News
- What is somewhat surprising is that the push higher in terminal rate expectations has been accompanied by a steepening of the 1-year swap Vs. 1-year swap rate 1 year forward (1y1y) and a flattening in the 1y1y Vs. 1-year swap rate 2 years forward (2y1y). Typically, the 1y Vs. 1y1y flattens into the last rate hike of the cycle, particularly when supported by softer data.
Figure 2: 1y Vs. 1y1y & 1y1y Vs. 2y1y
Source: Bloomberg / MNI - Market News
- Given the weakness of recent data prints, namely Q4 WPI, Q4 GDP and January Monthly CPI, one might have expected the market to push back against the RBA’s recent hawkishness with a flattening of the 1y Vs. 1y1y. The fact it hasn’t suggests a high degree of uncertainty in the market and a willingness to be dragged along by RBA speak.
- A 1y Vs. 1y1y flattener would therefore appear to offer a good risk-return play on the RBA pivoting towards a less hawkish stance today.
- As a reference, the last time terminal rate expectations reversed sharply lower after a 20bp+ steepening of the 1y Vs. 1y1y was in Jaunary. During that period, the 1y1y rate declined 80bp+ and the 1y Vs. 1y1y flattened 60bp+.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
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