J.P.Morgan Sell ACGB Sep-26 Vs. OIS

Late on Thursday J.P.Morgan wrote during last week’s outperformance in the AUD front end, the curve steepened a little vs. the U.S., and at these high levels of outrights we see the AUD-USD 5Yx5Y spread as likely to move inverse to the U.S.”

• “AUD swap should therefore underperform on a U.S. rally. However, a retesting of the highs in U.S. yields would likely be negative for risk, and so the exchange rate.”
• “This creates conflicting dynamics for 10Y swap spreads (attractive levels for unhedged longs in bonds, but prospect for underperformance to swap in a renewed sell-off).”
• “So, we look to play the recent richening in collateral and funding dynamics in the short-end, and on spread to OIS.”
• “The net cheapening in ASW since mid-year has disproportionately hit lines out to Apr-25.”
• “For points beyond like the Sep-26, the richening this week has been mostly to swap.”
• As such, they recommended selling ACGB Sep-26 vs. 3-Year OIS, to “lock in some BOB widening while playing for further potential collateral cheapening as liquidity withdrawal spillovers continue. “