RBC On Fair Value For ACGB Nov '24

RBC note that "market pricing for RBA rate hikes took a large leg higher last week, driven by a Fed which sounded less confident inflation would prove transitory, plus a second consecutive stellar month of gains in the Australia labour force survey. A full rate hike is now priced in to IB futures/OIS curves before the end of 2022, and around 3.5 hikes are priced in by April '24 - despite the RBA's YCC & forward guidance on the cash rate currently extending to the ACGB Apr-24s. With this much priced in, we think there is very good risk/reward now priced in to tactically buying/receiving the front-end. Structures like 6m1y and 1y1y appear to be pricing too much risk of near-term hikes, and hence we are evaluating tactical opportunities to receive within what will probably be a broad, choppy range through the rest of 2021. This is despite our more medium-term preference to be short/paid."

• "If the RBA chooses to roll, then "fair value" on the Nov-24s becomes more or less a moot point - the bond should rally down towards the 0.1% area. Whether the market believes the RBA will actually maintain YCC for that long is a different matter, and would open the possibility of Nov-24s reversing those gains at a later date. If the RBA doesn't roll however, then the market will have to re-assess where Nov-24s should sit on a curve which remains distorted by the impact of YCC on shorter bonds."
• Based on longer 3-Year futures basket bonds and "given Nov-24s are presently at about OIS-4bp, fair value for Nov-24s under a no-roll scenario is probably still around 5-6bp higher than their current yield. Therefore since our base case is that the RBA doesn't roll, we still expect at least some further underperformance in Nov-24s following the July RBA statement, even though a no-roll scenario is mostly priced in. If the curve remained unchanged except for Nov-24s, this would put their "fair" yield at about 0.50%. Basket-related pressures also remain something to watch out for when it comes to the Nov-24s, but these have lessened since the futures roll."