Westpac: AU/U.S. 10-Year Spread At Narrower End Of Expected Range

Westpac note that "in recent weeks the AU-US 10yr bond spread has fallen back into single digits. The question is whether or not it can move to 0bp or even back to a negative spread? One of the drivers of the recent outperformance has been rising UST yields, however it has also been driven by expectations of further RBA policy accommodation. That is now largely in the price, indeed it has not been this expensive on that basis since late last year, before the substantial correction wider in the spread. To the extent that Australia is a small open economy with a savings deficit that needs to attract capital and has a record borrowing requirement we do not think a negative spread will again be sustainable. There has been a major shift in the relative components since the pandemic struck. Noticeably, the real yield spread has widened while the inflation differential has narrowed. We would not expect this to shift much near term, especially as Australia's improving position relative to peripheral Europe and unchanged relatively versus other AAA nations. So, while we do not expect a significantly wider spread, and would use such episodes to enter narrowers, the current level is at the narrower end of our expected range."