RBC QE Playbook

RBC Outline 3 new QE trades:

• Buy WATC Jul-28 ASW at 17.5bp, with a target of 5bp and a stop at 25bp. They reason that "with at least $100bn of ACGBs & semis to be absorbed by the RBA over the next six months, on top of what we expect will be a wind-down in the CLF meaning more HQLA buying from balance sheets, a diminished supply of high-quality spread product will be in hot demand. The sudden switch in issuance dynamic should favour physicals over swap at the longer end. WATC remains our preferred issuer despite sitting a bit rich, and Jul-28s are the first bond on the WATC curve with decent (+8bp) ASW pickup over bonds a year shorter."
• Pay AU 10-Year swap EFP vs. receive US 10 swap spread at -5bp, with a target of 20bp and a stop at -15bp. They reason that "much lower (and possibly negative) net bond supply available to the market in AU, and possible higher supply should fiscal plans in the US go ahead, mean a divergent set of themes on cross-market swap spread. We look to take advantage on both legs, particularly the AU side."
• Buy ACGB Nov-22 outright at 10bp, with a target of 3bp and a stop at 15bp. They reason that "with front-end rates anchored by the surplus ES rate moving to zero, and increasing quantities of surplus cash likely to keep seeking a home, the Nov-22s look attractive at only 10bp. Equivalent tenor swap, and other short end instruments like t-notes are yielding substantially less. RBA OMO repo went through today at 12bp, suggesting Nov-22s are negative carry at the moment, but we expect this cost of funding to drop in coming days."