TD Securities: 3s10s ACGB/Swaps Curve - Bias to Steepen

TD Securities note that "the 10-Year ACGB yield was 2 standard errors (s.e) below our model estimate on 20 August, which coincided with the 10-Year ACGB yield hitting its recent low. From a model perspective, the subsequent grind higher in the 10-Year ACGB yield and underperformance vs. U.S. 10-Year makes sense."

• "We expect this move higher in yield has further room to run. Why? 1. Our model estimate points to higher yields and the actual 10-Year has tracked the directionality of the model estimate. 2. The actual 10-Year yield is still closer to levels 2 s.e. below the model estimate (1.16%) than our fair value estimate (1.499%). This means the magnitude of a potential move higher in 10-Year yield exceeds the potential move lower."
• "In the near term, a China led risk-off episode may flatten the curve. However, the RBA Governor reiterating the Bank is in no rush to normalise policy (anchoring the front end), limited scope for a push lower in 10-Year ACGB yields based on our model and our U.S. team initiating a short 10-Year real rate trade support progressively steeper ACGB and AUD swap curves."