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AU Curve Too Flat Vs. U.S.

AUSSIE BONDS

The change in narrative over recent weeks from data dependency to global banking concerns delivered a sharp 45bp steepening in the U.S. Tsy 2/10 curve. On the back of hawkish messaging from Fed Chair Powell in early March, the U.S. cash curve had moved to -107bp, it's most inverted since the 1980s.

  • In sympathy with U.S. Tsys, the AU 3/10 curve also steepened as global curve correlations returned as the key driver.
  • Prior to recent adverse credit developments, the AU curve had been trading in a 25-60bp range. Moreover, domestic developments had been imparting a significant influence on AU curve movements consistent with the notion that global curve correlations lessen as the tightening cycle matures and policy rates follow their independent paths.
  • A simple regression of the AU 3/10 – US 2/10 curve box against the AU 3-year/US 2-year yield differential (over the tightening current cycle) suggests the AU curve is 10-15bp too flat relative to the US curve given the AU-US short-end yield differential.
  • When global banking concerns dissipate, one would expect the AU 3-year/US 2-year yield differential to re-exert itself as the key driver of relative curve movements.

Figure 1: AU 3/10 – US2/10 curve box (% Y-Axis) Vs. AU 3-year/US 2-year Yield Differential (% X-Axis)



Source: MNI – Market News / Bloomberg

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