Strong Bid Ahead Of RBA Decision Tomorrow

ACGBs strengthened on Monday, aided by a richening in U.S Tsys (on Friday & in Asia dealing) and a well-received auction of ACGB Sep-26, leaving YM +9.0 & XM +14.0 at the close. Also adding support, at the margin, was the February MI Inflation Gauge, which showed tentative signs of peak inflation, and the market’s initial reaction to the Chinese NPC setting an annual growth target (“around 5%”) at the less ambitious end of expectations. Cash ACGBs were 9-14bp richer with the 3/10 curve 5bp flatter.

• AU/US cash 10-year yield differential was -2bp at -18bp, after hitting an intraday high of -13bp.
• 3s10s swaps curve bull flattened 6bp on the day with rates 9-15bp richer and 10-year EFP slightly narrower.
• Bills close at session highs to be 5-11bp richer (except IRH3 +1bp), led by the reds.
• A 25bp hike from the RBA tomorrow is almost a lock according to RBA-dated OIS with the market pricing a 92% chance of such an outcome. Beyond the March meeting, however, the market is less certain with a 74% chance of a 25bp hike in April priced and a cumulative 33bp of tightening priced by May. Terminal rate pricing is around 4.14% versus its recent peak of 4.35%. At the core of this uncertainty is the possibility that the RBA could change its policy guidance in the all-important last paragraph of the decision statement tomorrow in response to the downside surprises, amongst others, to Q4 WPI, Q4 GDP and January monthly CPI.