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Cheaper, Narrow Ranges, AU-US10Y Spread Too Low

AUSSIE BONDS

ACGBs (YM -6.0 & XM -4.0) are cheaper, but off the worst levels, after dealing in narrow ranges during the Sydney session ahead of the US Thanksgiving holiday. Japan was out today in observance of their Labour Thanksgiving holiday.

  • The local calendar provided few domestic drivers, with the previously outlined flash Judo Bank PMI data as the sole release.
  • Accordingly, today’s heavy price action can be largely attributed to RBA Governor Bullock’s relatively hawkish speech after-market yesterday. In summary, the Governor noted that the final stretch of reducing inflation to target will take longer than the initial leg. Additionally, she stated that “the remaining inflation challenge we are dealing with is increasingly homegrown and demand-driven”.
  • Cash ACGBs are 4-6bps cheaper, with the AU-US 10-year yield differential 5bps higher at +8bps. A simple regression of the AU-US cash 10-year yield differential and the AU-US 1Y3M swap differential over the current tightening cycle indicates that the 10-year yield differential is currently 12bps too low versus its fair value. (See link)
  • Swap rates are 4-6bps higher, with the 3s10s curve flatter.
  • The bills strip is cheaper, with pricing -4 to -8.
  • Tomorrow, the local calendar is empty, with the next key release being Retail Sales on Tuesday.
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