Goldman: China Reopening & Japan YCC Adjustment Drive Antipodean Underperformance

Goldman Sachs note that “Antipodean yields have underperformed most of G10 since the start of December amid a repricing higher in both peak rates for the cycle and longer term yields.”

• “For Australia, this has translated to a terminal rate that has converged towards (but remains modestly below) our economists’ 4.10% projection, whereas Kiwi rate pricing sits roughly 30bp above their 5.25% estimate.”
• “The rapid reopening in China has likely played a role in the selloff in both rates markets. Though our economists view the magnitude of the growth boost from pull forward of reopening as likely modest, there is potential that the overall backdrop could prolong the RBA hiking cycle in particular.”
• “Additionally, the BoJ’s surprise decision to widen its YCC target range drove a global selloff on the day, but ACGB swap spreads responded particularly acutely, likely reflecting the relatively sizeable presence of Japanese investors in the Australian fixed income market.”
• “Looking ahead, we believe Australian bonds are more likely to see further underperformance because the central bank’s more cautious approach to tightening policy increases the risk of a more prolonged cycle in the event of a better growth environment.”