TD Securities Recommend 5s10s AUD/USD X-ccy Flattener

TD Securities note that "the outlook for bank funding has taken on increased importance in light of the RBA scrapping the Yield Target. The subsequent back up in yields has most likely advanced bank funding decisions earlier than many had likely expected."

• "The phasing out of the Committed Liquidity Facility and Australian banks most likely spreading out their funding requirements to meet repayments re: the Term Funding Facility means Australian banks are likely to step up foreign issuance."
• "We expect AUD/USD cross currency basis to widen across the curve. But we expect the 5-Year segment to be most prone to widening as banks are likely to target this maturity point for offshore issuance."
• "The risk to the flattening trade is the prospect that Kangaroo issuance resurfaces at the 5-Year point. We enter a 5s10s AUD/USD x-ccy curve flattener covering the Mar '22 IMM date (A$20K DV01)." The position is entered at 8.5bp, with a target of 1.5bp and a stop at 12.5bp. This trade incurs 1.2bps of negative roll down over 4 months.