NAB: Looking For Wider Swap Spreads In 2021

NAB note that "having reached lows in mid-September of around -14bps for 3 year EFP and -13bps for 10 year EFP swap spreads have been edging wider. Our short-term view on swap spreads has been that they were range bound but that we had seen the lows with a range of -8bps to flat on 3-year EFP and -5bps to +5bps on 10-year EFP. While we think these trading ranges will hold in the near-term over the medium term, as the macro outlook for 2021 improves we look for the swap curve to ultimately make a sustained move back above the bond curve (at least between 5 year to 15-year part of the curve). For now, under Yield Curve Control the 3-year EFP will likely remain negative (generic 3-year swap spreads though will be positive) but the 10-year EFP will ultimately break above zero. While we do not see spreads moving out to 2019 levels, a widening in 10-year EFP towards 10bps is possible. Why? In an improving macro outlook where yields are expected to drift higher (and curves steepen), corporate hedging activity is likely to pick up and it is this payside flow which has been lacking since the pandemic."