UBS Flag Potential RBA QE Tweaks, Suggest 20s Look Cheap

UBS note that using their "forecasts for ACGB issuance, and assuming that the RBA will keep the composition of its purchases unchanged, we estimate that, by the end of Aug '21, the Bank should hold ~37% of the lines in 5-12yr sector; but a material ~50% of the lines in the 5-8yr sector. We think that the Bank won't be comfortable owning ~50% of some of the lines in the belly of the curve, especially given that ADIs - which need to hold ACGBs for regulatory purposes - are particularly prominent in this sector."

• "We think that the RBA will consider two alternatives: 1) they could skew their buybacks to the ~10yr point of the curve; or 2) they could extend their purchase range to ~20yr bonds. Both these options would bring the WAM of RBA buybacks (currently at ~7yrs) more in line with the WAM of AOFM issuance (currently at ~10.3yrs). Focusing buybacks where issuance is happening reduces the risk of impacting market functioning, while also facilitating the AOFM task. Importantly, lengthening the WAM of RBA buybacks would also deliver more 'bang for buck'; given that, with the same amount of QE (i.e. $80bn of ACGB buybacks) the RBA would deliver a ~3x larger reduction in DV01."
• "The ACGB curve is very steep beyond the ~12yr point, and rightly so given that the RBA hasn't been buying in that sector. However, given the risks of an extension of the RBA purchase range, we think that the ~20yr sector of the ACGB curve looks cheap. We also continue to like being paid AUD 10Y EFP."