J.P.Morgan Recommend Receiving 12-Month BBSW/SOFR Basis

J.P.Morgan write “given our bias for a little more policy tightening to come from the RBA, and more definitively, that cuts are unlikely soon, we see recent compression in BBSW-OIS as unsustainable from a cyclical perspective.”

• “Spread narrowing also is against the grain of seemingly chronic credit frictions in pockets of the U.S. banking system, and domestically, the looming payback schedule of the TFF, which will be draining reserves.”
• “Throughout recent months we have been tactically advocating received positions in the front-end of the AUD cross-currency curve, as TFF withdrawal was at various times priced asymmetrically between FX-OIS and BBSW-OIS.”
• “We are back in such a range now, despite the fact that TFF withdrawal starts to build quite soon. Most draws on the first tranche of TFF were made close to the final claim date in September 2020, but smaller banks started in April 2020; payback for those earlier allotments begins this month.”
• “By mid-year, TFF repayments should be around A$13bn, then roughly double each month to a cumulative A$83bn drag on reserves by the end of September. A similar pattern is repeated for the second tranche.”
• “As shorter BBSW-SOFR points have reverted back to the highs, inverse to the BOB dynamic, we see opportunities to re-enter received positions. Fed interventions may be inflating the balance sheet again, but with banks being disintermediated via money market funds in the process, reserves are still under pressure.”
• “A larger Fed balance sheet is no great consolation for USD funding if reserves are contracting; this nuance is important in capping FX-OIS and should preserve much of the global transmission we come to expect from late-cycle dynamics into USD tightness. Receive AUD 12M BBSW-SOFR basis at -0.7bp.”