RBC Adjust Yield Forecasts

RBC note that after adjustments to their Fed & BoC views, they adjust their Aussie bond yield forecasts, which “now peak around Q3/Q4 this year before gradually stepping down as: 1) the end draws nearer for terminal rates in the U.S.; and 2) the RBA doesn’t deliver as much or as quickly as markets are expecting, leading (eventually) to markets also revising down terminal pricing. Our prior profile had yields rising across 2023 and 2024, so this is a marked change in narrative for us to have yields consistently stepping lower as we move towards the end of this year and throughout 2023. We think there should be some pullback near-term given how far and quickly things have gone lately, and hence our Q222 yields are a bit lower than the market has. Our curve shape bias after a near-term pullback is for further bear-flattening into H222, followed by some bull steepening into 2023.”

• Adjustments to their yield forecasts are outlined below, with prior forecasts in ():
• Aussie 2-Year: Q222: 1.70% (+60bp), Q322: 1.85% (+55bp), Q422: 2.00% (+50bp), Q123: 1.90% (+30bp), Q223 1.80% (+10bp), Q323 1.70% (-5bp), Q423 1.60% (-20bp).
• Aussie 5-Year: Q222: 2.60% (+90bp), Q322: 2.80% (+100bp), Q422: 2.75% (+80bp), Q123: 2.70% (+50bp), Q223 2.60% (+30bp), Q323 2.50% (+5bp), Q423 2.40% (-10bp).
• Aussie 10-Year: Q222: 2.95% (+75bp), Q322: 2.95% (+65bp), Q422: 2.80% (+35bp), Q123: 2.75% (+20bp), Q223 2.75% (+15bp), Q323 2.65% (+5bp), Q423 2.60% (unch.).
• They note that “risks to our profile are numerous, including more persistent and long-lasting inflationary pressures and also the possibility of curve steepening precipitated by central banks shrinking their balance sheets more aggressively than markets have built it. This was highlighted by the sharp market reaction last week to Brainard’s comments around a “rapid” possible pace of Fed balance sheet reduction. We do not, however, think political risk in Australia is sufficient to materially shift our yield profile or strategy bias. In what will be a tightly contested election, the risk of minority government would likely see some policy stalemate and additional fiscal spend but would probably not impact markets significantly or on a sustained basis. A change of government, as the polls would suggest, to Opposition Labor is also unlikely to have too much lasting impact given that there are no significant policy differences/big-ticket items between the two major parties.”