CBA AUD Conditional Bull Steepener Trade Idea

CBA note that “AUD short rates have risen sharply in spot and forward recently, particularly in the last month. Markets are expecting the RBA to take policy rates above 3.00%. The CBA view is that neutral is 1.25%, but we acknowledge that a persistent inflation story and tight labour market and wages outcome could take this higher. Equally, we are very conscious of the impact of higher mortgage rates on consumers.”

• “We do not see the economy as being static, and so once rate hikes start to come through, the impact will be felt by consumers. Similar reactions can already be seen in the NZ economy.”
• “The expected AUD rate hike pricing goes above that of previous cycles and sits above the market based expectations for the U.S..”
• “As such, a trade that takes advantage of a potential pull back in AUD forward swap rates to a more normal level makes sense, and we see the best iteration via a 1-Year forward 2-Year vs 1-Year forward 10-Year receiver swaption.”
• “The forward swap curve is the flattest it has been since the financial crisis and given the tendency for markets to overshoot on hiking expectations, we see further validity to this trade.”
• “At current strikes of 3.29% for the 1Y2Y and 3.24% for the 1Y10Y we propose investors buy an ATM‑50bp 1Y2Y receiver and sell an ATM‑35bp 1Y10Y receiver (delta matched), which gives strikes of 2.79% and 2.89% respectively. The premium for this trade is 6.5bp.”