### POV: AU/US SPREADS IN THE SHORT....>

AUSSIE BONDS: ### POV: AU/US SPREADS IN THE SHORT END COULD BE IN FOR A BUMPY

RIDE.

The AU/US 2-Year spread dropped into negative territory last week for the first

time in 17 years, currently at -3.15bp. The floor of the Aussie bond 2-Year

yield can be assumed as the RBA cash rate of 1.50%, though economic fundamentals

have been mixed from Australia recently there has been nothing to dispel remarks

from RBA Gov. Low when he said in November that the next RBA move will be a

hike, not a cut. The US 2-Year yield is currently at 1.806% and so has around

55bp of hikes from the Fed priced in. Markets have almost fully priced in a hike

by the FOMC in Demcember (MNI PINCH estimates around 90%), but in the most

recent cycle all the hikes have been "dovish" that have been followed by a drop

in 2-Year yields. If this were the case then the AU/US 2-Year spread would

likely go back into positive territory, but will almost certainly turn negative

through 2018. Aside from the economic fundamental picture, recent positioning

and flow data also suggests Aussie bonds will come under pressure, in Q3'17

foreigners were net buyers of Aussie bonds for the first time in 12 months.