TD: Go Short 5-Year ACGBs Vs. U.S. Tsys

TD Securities have issued a recommendation to sell 5-Year ACGBs vs. the U.S. Tsy equivalent, using ACGB Nov-27. They recommended entering the position at -58bp, targeting a move to +20bp, with a stop set at -100bp.

• They note that their “current terminal rate forecast for the RBA at 3.60% in Mar ‘23 and the Fed at 5.50% in May '23 means the cash rate differential should widen from -115bp currently to -190bp by May '23. This implies ACGB outperformance over USTs, at least near term. However, we believe that ACGB outperformance is approaching limits.”
• “ACGB bonds have significantly outperformed in the last month with the RBA pushing back on the need to hike aggressively and with the Fed suggesting a slowing in the pace of hikes, USTs could lead the next rally. Consistent with this, our bond forecasts have longer-dated U.S. yields peaking this year despite our higher Fed Funds trajectory into 2023.”
• “Second, the data and the RBA's forecasts suggest the risks are skewed to a cash rate exceeding our 3.60% forecast. Net-net this translates to limited AU outperformance over the U.S. and the potential for widening over the course of the coming year.”
• “The trade carries at -5bp over 3 months with negative roll down of -3.5bp over the same period. We initiate this position with limited risk and will consider adding on a break of -80bp.”