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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 BONDS
Today, the AU-US 10-year cash yield differential is 4bps higher at +7bps following a relatively hawkish speech from RBA Governor Bullock after-market yesterday. The Governor noted that the final stretch of reducing inflation to target will take longer than the initial leg.
- Additionally, she noted that “the remaining inflation challenge we are dealing with is increasingly homegrown and demand-driven…a more substantial monetary policy tightening is the right response to inflation that results from aggregate demand exceeding the economy’s potential to meet that demand”.
- At +7bps, the cash AU-US 10-year yield differential currently sits near the middle of the range of +/-30bps which has been observed since November.
- The underperformance in the ACGB 10-year since early October can be attributed to a 55bp widening in the AU-US 3-month swap rate 1-year forward (1y3m) over that period. The 1y3m differential is a proxy for the expected relative policy path over the next 12 months.
- However, a simple regression of the AU-US cash 10-year yield differential and the AU-US 1Y3M swap differential over the current tightening cycle indicates that the 10-year yield differential is currently 12bps too low versus its fair value (i.e., +7bp versus +19bp).
Figure 1: AU-US Cash 10-Year Yield Differential (%) Vs. Regression Fair Value (%)
Source: MNI – Market News / Bloomberg
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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