Bank Of America Look For Flattening Of 5-/20-Year Real Yield Curve

Bank of America Research note that "the Reserve Bank of Australia (RBA) is prepared to adjust the current unconventional policy package, but there appears to be less urgency despite a bigger inflation undershoot relative to other central banks. Instead, focus is on the scope for more expansive fiscal policy. The RBA's efforts have been directed towards market functioning, pushing wholesale funding rates lower and to providing liquidity to the financial system. Average inflation targeting is temporarily on hold. The steepness of the inflation breakevens curve is consistent with flexible inflation targeting. However, it is now more vulnerable to both global risk-off and growing appetite for AUD nominal duration, particularly by offshore investors. The slope of the real yield curve has steepened back to pre-2016 levels and is at odds with both the structural damage to the economy from the crisis and limitations on the RBA's ability to normalize policy. We think the 5s-20s real curve has scope to flatten due to the fundamental backdrop and reduced front-end linker carry."