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AU Vs. US Curve Correlation Corrects

AUSSIE BONDS

In early March, the shift in focus from data dependency to global banking concerns led to a steepening of 45bp in the U.S. Tsy 2/10 curve. It also caused a noticeable steepening in the AU 3/10 cash curve and an increase in global curve correlations.

  • Before the recent credit issues, domestic developments were having a significant impact on the movement of the AU curve, consistent with the notion that global curve correlations decreased as the tightening cycle matured and policy rates followed their independent paths.
  • As global banking concerns ease, it seems that the correlation between AU and US curves is decreasing. If this trend continues, the yield differential between the AU 3-year and the US 2-year is expected to become the main driver of relative curve movements.
  • A simple regression of the AU 3/10 - US 2/10 curve box against the short-end yield differential during the current tightening cycle suggests that the AU curve is 15-20bp too flat relative to the US curve.

Figure 1: Rolling 10-day Correlation – ACGB 3/10 Curve Vs. US Tsy 2/10 Curve



Source: MNI – Market News / Bloomberg

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