Westpac Adjusts Medium Term 3-Year Yield Call

Westpac note that "the RBA has clearly signalled, in recent Minutes of the March and April Board meetings, that when it decides to scale back on YCC it will do so by not extending the maturity of the bonds it is going to buy at the cash rate. It has also indicated that it will not raise the purchase yield on longer maturity bonds. We expect next year's February Board meeting will be the time to do that; announcing that it will not extend YCC beyond the November 2024 bond and will begin tapering its QE program to $50bn. Our current forecast profile for 3-year yields has been for an increase to 0.3% over 2022. With the RBA now expected to be absent from the 3-year bond market in 2022 we have lifted the end point for 3-year yields in 2022 to 0.8%."

• "With our target 10-year yield at 2.5% by end 2022 that will still be a very steep yield curve. But we believe this will be in an environment where the authorities are emphasising their patience and markets will gradually ease back on expectations for rate hikes in 2023. Accepting 2 years plus of a 3-year maturity with the cash rate steady at 0.1% will hold down those 3-year rates. Recall the 2016–2018 period when markets were comfortable with a steady rate outlook and the cash/3-year margin hovered around 40–50 basis points."
• "Beyond 2022, as rate hikes appear closer, and long bond rates move further towards our "equilibrium" target of around 3%, 3-year rates will lift much more quickly nearing 1.5% through 2023. (with a range of 50-75 basis points in expected rate increases over the near-term years of the tightening cycle)."