AUCTION PREVIEW: ACGB May-28 Supply Due

The Australian Office of Financial Management (AOFM) will today sell A$700mn of the 2.25% 21 May 2028, issue #TB149. The line was last sold on 10 February 2023 for A$500mn. The sale drew an average yield of 3.5188%, at a high yield of 3.5250% and was covered 5.7000x. There were 45 bidders, 14 of which were successful and 7 were allocated in full. The amount allotted at the highest yield as a percentage of the amount bid at that yield was 6.5%.

• The last outing for the May-28 bond went very well with the weighted average yield printing 1.64bp through prevailing mids and the cover ratio above the 5.50x mark.
• Uncertainty regarding the near-term outlook for RBA policy may however work to cap demand. Q2 CPI is scheduled to be released on July 26. If core CPI and services inflation don’t decline substantially, then a hike on August 1 is distinctly possible, as the labour market remains “very tight”, wage growth is picking up, house prices are rising, and households have savings buffers. The RBA-dated OIS market currently attaches around a 50% chance of a 25bp hike.
• Of more immediate interest is RBA Governor Lowe’s speech today. Investors will be hoping to gain insights into the central bank's level of concern regarding inflation after the policy pause this month.
• The flatness of the yield curve could also be a negative for today’s bid. The 3/5 cash curve currently sits just above its flattest level since the GFC at -3bp.
• The recent outright cheapening in the line should however provide some sort of offset for the above concerns.
• Overall, another round of well-received supply is expected.
• Results are due at 0200 BST / 1100 AEST.