Westpac: AU-U.S. 10-Year Spread Set To Move Even Further Inverse.

Westpac highlight last week's "domestic market outperformance vs. a U.S.-led sell-off. That is the usual relationship, however it has been made more relevant by the growing fears and uncertainties around the local delta-variant outbreak. To the extent that remains central to domestic risk rewards, then we can expect further narrowing in coming weeks."

• "Beyond those near-term drivers, however, the question is whether the 10-Year spread will be able to sustain an even larger inversion than is currently the case. We think it can. While it is true that the cash spread tends to dominate the longer spread movements, with both the RBA and Fed cash rates at their effective lower bounds, and unlikely to be shifted any time soon, any material inversion is unlikely, although our forecast relative cash profile suggests the conditions are again building."
• "Other conditions for good support of Australian bonds are also in place. Aussie bonds still offer good value versus peripheral Europe, and still provide around 100bp of pick-up to the average 10-Year of other AAA nations, which is significant in a low yield world. To put that in an even broader context, US$14tn of bonds still exhibit a negative yield, so "yield enhancement" support still favours the local bond market. The positive real yield spread is also supportive in this context."