Payside Flows May Support Swap Spread Widening In Coming Months

Westpac note that "swap spreads have moved back into positive territory after spending the majority of 2020 unusually inverse to ACGBs. That inversion was largely a result of fear around the surge in government issuance. However, those fears have dissipated as the deficit looks like coming in well below prior expectations. So what about the demand/supply equation from the swap perspective?" They note that in recent times, most months have seen "the 3-Year average payside flows fall below the 5-Year average, as liability managers saw less need to lock in hedges as cash and market rates tumbled in recent years. However, February saw a large pick-up and March saw another large shift toward payside. That reflects speculation about an earlier RBA hike cycle and an associated bear steepening. Over the 6 months to October '21 potential payside hedging is the largest in many years. So that has the potential to support wider swap spreads over coming months."