RBC: Use Selloff To Re-Enter Swap Flatteners; Switch 2-5s For 2-7s

RBC close out their old "6mf 2-5s q/q swap flattener, realising a slight 2bp profit. This was entered back in May at 26bp and has now gone above its revised stop of 22bp given the US treasury-led sell-off overnight and continued fixed income weakness in Asia today. At the same time, though, we enter a new 6mf 2-7s swap flattener (also q/q) at 49.8bp. This curve is 2 standard deviations steeper than its 3m average, and carry & roll is decent at about 2.9bp/3mths. Given current volatility, we think a wide stop is necessary, so we're setting that at 60bp, while our take-profit is a fairly ambitious 30bp (which we last saw in March). We believe offshore-led steepening is to be faded in A$ rates space, and last night's Powell-driven price action provides an attractive entry opportunity on our core themes of mid-curve term structure flattening driven by a patient and stable RBA plus ongoing yield enhancement flows. We also note that AU curves remain significantly steeper than most global peers across both swap and cash product, offering a relatively strong carry & roll profile."