Westpac: 10-Year Yields Should Not Fall Far From Current Levels

Westpac note that "relative valuations have shifted in a volatile manner over the past few trading sessions. One metric for assessing the level of 10-Year bond yields is where we look at the spread between the 10-Year yield and the 3-Year forward cash rate (as a reflection of current RBA messaging around when the easing cycle might begin). It was as high as 106bp on the 11th June and is currently around 53bp. We think it should not narrow much further than that, as levels below 50bp have previously represented the risk to growth in the pandemic and prior to that, the anticipation of slow growth and potential rate cuts. That suggests limiting any long positions, even those as part of a curve flattening position. 2-/5-/10-Year bond and swap butterflies show the 5-Year as the cheapest on a relative basis it has been in a number of years. We think this should eventually be faded, but has a little further to run for now. We will therefore be minoring both spreads for a trading opportunity in coming days."