BofA: Buy AUD Duration, Sell USD Or CAD

Bank of America note that “ACGB yields have now moved about 50bp above our forecast for Q4. We see AU duration as trading cheap and forecast 10y bonds will settle at 3.6% (circa 60bp below current levels) by the end of the year. We like buying AUD duration outright but see relative value in selling the USD or CAD 10y vs. 10y ACGBs.”

• “Relative value metrics that suggest 10y AUD yields are cheap versus U.S. and CAD. One fair value framework regresses the cross-market 10y ACGB vs. 10y UST spread against the central bank policy rate spread and the spread between central bank expectations (measured as the spread between 2y yields and policy rates on a cross-market basis). This regression suggests the spread is c. 40bps cheap vs. fair value which is a z-score of about 1.6. This suggests that AUD is cheap to U.S. in the 10y sector.”
• “Additionally, when we look at CAD 10y vs. U.S. 10y in this same framework, we find that U.S. 10y rates are relatively cheap to CAD 10y, by about 12bp or a z-score of 1.4.”
• “The implication is that while our view is for AUD rates to decline, there is some evidence that on a cross-market basis, there is relative value to be gained by selling U.S. 10y or the richer CAD 10y against an AUD position.”