Goldman Sachs: Fade Excessive Risk Premia In Front End Of Curve

Goldman Sachs note that "the front-end selloff has been global in nature. At present, AUD OIS forwards are pricing in not only an earlier start, but also a steeper path of policy normalisation (with about 4 hikes in aggregate by YE23) than we expect, and imply a mounting risk of that the RBA doesn't follow through with its current guidance that rate hikes are unlikely until 2024 at the earliest. This pricing is somewhat puzzling, in our view, given the relatively weaker domestic picture - there is considerable labour market slack, wage growth remains subdued, and core inflation is still below target, all of which should keep the RBA on a relatively more dovish track relative to most other G10 central banks."

• "While the bank may eventually be willing to reconsider its current commitment to easy policy given a still constructive medium-term-outlook and a rapid pace of vaccine roll-outs, we see this as unlikely to be reassessed in the near-term amid continued lockdowns. Even with such a reassessment, the extent of hikes already priced may offer a sufficient buffer for front end longs. We therefore recommend receiving 1y1y AUD OIS." They enter the received position at 64bp, with a target of 40bp and a stop at 80bp.