The 5-10yr Curve Is The “Sweet Spot” For Flattening

Westpac note that "even before the speech by Dr Lowe shifted the dial, we were in favour of fading curve steepening impulses, especially if they were US-led. One of the reasons for that was our view that the AU bond term structure had already made significantly large concession for supply, especially at the long end of the curve. Indeed, given that the ACGB borrowing programme for 2020-21 came in at the lower end of exp., that view had gotten stronger in recent weeks. And that was before the concept of a more long-end focused and larger RBA asset purchase plan was in the pipeline! In addition, the type of steepening that has been undertaken in 2020 is commensurate with the market predicting a turn in the policy cycle. History shows that as the RBA embarks on further policy accommodation, the curve flattens back down. We think we are at the beginning of just such a phase. Buying ACGBs much beyond 10yrs will probably not suit the RBA's approach, the "sweet spot" for the curve is actually the 5-10yr segment. We expect it could flatten down to around 30bp in coming months."