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AU-CA 10-Year Yield Differential Slightly Above Fair Value Ahead Of BoC Policy Meeting

AUSSIE BONDS
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The RBA’s official rate is currently 40bps below that of the BoC, but this differential appears set to narrow to +15 bps later today if market pricing proves accurate.

  • More interestingly, looking 12 months ahead using 3-month swap rates 1-year forward (1Y3M), the market now expects the RBA’s official rate to be 76bps higher than the BoC’s. (See link)
  • A simple regression of the AU-CA cash 10-year yield differential, which is currently around its highest level since last December, against the AU-CA 1Y3M spread over the past 12 months suggests that the 10-year yield differential at its fair value of +94bps.


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The RBA’s official rate is currently 40bps below that of the BoC, but this differential appears set to narrow to +15 bps later today if market pricing proves accurate.

  • More interestingly, looking 12 months ahead using 3-month swap rates 1-year forward (1Y3M), the market now expects the RBA’s official rate to be 76bps higher than the BoC’s. (See link)
  • A simple regression of the AU-CA cash 10-year yield differential, which is currently around its highest level since last December, against the AU-CA 1Y3M spread over the past 12 months suggests that the 10-year yield differential at its fair value of +94bps.


Keep reading...Show less