Westpac: Any Supply-Related Bear Steepening Will Be Limited

Westpac note that "there is a significant issuance profile in both the U.S. and AU markets to start this week. Indeed, issuance will remain a central market focus in coming weeks, especially as the Biden fiscal plan takes central stage and as we approach the Australian Federal Budget on 11 May. From a tactical perspective, risk reward around this issuance is likely to have a persistent bearish skew. So, does that mean that bond market valuations are likely to shift from a medium-term strategic perspective? We do not think so. From an Australian perspective, our assessment of relative value is based on 2 broad metrics. The first is the shape of the curve relative to cash expectations, which shows that 10-Year yields would be looking at price action similar to the taper tantrum of 2013 to shift much steeper. The RBA is ensuring the opposite of that with its QE approach. The second assessment is where inflation expectations have shifted to. 10-Year breakeven inflation has been trading just above 2% for some time now, and it will take actual inflation outcomes to quickly and sustainably rise to push that outlook much higher. That, in our view, is the central determinant of the broad range trade at the longer end of the curve. It is unlikely to shift anytime soon, even given the near-term issuance outlook."