BofA: Budget Key To Outlook For Swap Spreads

Bank of America write “swap spreads have moved close to decade highs as extraordinary volatility and concerns about the soundness of offshore banks led to 3-Year and 10-Year swap spreads to widen by about 10bp last week.”

• “The fundamental pressures driving front-end swap spreads wider are likely to change from mid-year as a pickup in ACGB supply from July cheapens bonds to swap.”
• “We hold off on a trade recommendation for now but look to the Australian government budget in six weeks as a potential catalyst for adding a new position in swap EFP.”
• “The Australian government has flagged a review of conservative commodity price forecasts in the budget and the way they choose to incorporate commodity-price changes could have an outsized impact on the steepness of the swap EFP curve.”