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AU/US 10-Year Yield Differential Holds Range

AUSSIE BONDS

The onset of global banking concerns in mid-March saw a plunge in U.S. STIR pricing and dramatic realignment in 1-year forward 1-month (1Y1M) OIS in the U.S. versus Australia. Since then, the AU/US 1Y1M differential has consolidated around that post-banking crisis level.

  • In sharp contrast to relative price movements at the short-end, the AU-US cash 10-year yield differential has traded in a comparatively narrow range of -32bp to -12bp.
  • While there can be many variables at play in a cross-market differential, a simple regression of the AU/US cash 10-year yield differential versus the AU/US 1Y1M OIS differential over the current tightening cycle suggests that the 10-year yield differential is currently around 25bp too negative (i.e. -24bp Vs. fair value at +1bp).
  • With banking concerns receding, however, it may be the short-end differential that ends up correcting the abovementioned mispricing. The AU/US 1Y1M has narrowed 30bp over the past week.

Figure 1: AU/US Cash 10-Year Yield Differential (%) Vs. AU/US 1Y1M OIS Differential (%)



Source: MNI – Market News / Bloomberg

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