RBC Roll Up The Curve

RBC note that they "take profit on ACGB Nov-25s (held EFP vs. 3yr futures) at 12bp, realising 6.5bp of profit. Our main motivation for closing this out is to extend further up the curve, so at the same time, we recommend buying ACGB Apr-29s, also vs. 3yr futures, at 51.25bp, a pickup of 39.25bp over the Nov-25s. Carry & roll on the Apr-29s (without taking the futures leg into consideration) is about 4.6bp/3mths. Our take-profit target is 35bp, and our stop 60bp. Given that the RBA is likely to drop rates further at the November meeting and discuss or implement a longer-tenor QE program (potentially including 5–10yr bonds), we think the term structure out to 10 years has further room to flatten. Our beta to US rates has ensured that our benchmark 3–10s futures curve has steepened in recent days to~66.5bp, remaining well above 6m range lows (mid 50s). Nov-25s have outperformed in recent weeks, and QE should promote some 5–10s flattening. We were tempted to buy slightly longer to capture an even greater flattening should QE emerge next week, but carry/roll on the Apr-29s is better than on 10y basket bonds, and they're also a touch less exposed to offshore curve moves. Alternatively, for those less willing to move into 10yr bonds, we also think the Apr-27s represent good value, standing out on the curve, and were considering switching into those instead."