Bank Of America: Wider Swap Spreads & AU Rates Outperformance

Bank of America have noted that "the Reserve Bank of Australia (RBA) extended the Bond Purchase Program by AUD100bn in February and delivered a strong dovish statement. Yet it did little to arrest the backup to longer-term yields, AU rates underperformance in geographical spreads and strengthening of the currency. Focus is now on RBA management of the 3yr yield target where a bond shift is needed, June deadline for the Term Funding Facility and whether bond purchases will cease in August, which could overlap with an early federal election. In our view, the RBA would likely prefer gradual policy adjustments and the uneven recovery argues for ongoing balance sheet expansion over 2021 that supports spread markets. There is scope for 10-year swap spreads to push wider on supply/demand dynamics and after the 1Q seasonal increase to Kangaroo issuance. We also retain our bias for AU rates to outperform in cross-markets over time. Shorter-dated Semi spreads are at record tights and wideners would serve as a hedge to RBA tapering risk."