Westpac: AUD Outperformance Is A Core Medium Term Position

Westpac note that “the AUD market spent late last week marginally underperforming the UST-led sell-off, with the AU-US 10yr bond spread widening back into the low single digits at one stage.”

• “That reflects a re-calibration of RBA policy risks in line with similar shifts in the U.S.”
• “Medium term we would not expect this underperformance to continue. Rather, we think that the RBA pricing is more in line with “higher for longer” than the U.S., and so the domestic bond market should outperform on U.S.-led sell-offs.”
• “There will be good support should we move back toward 0bps, especially with the final FY23 budget position being a A$22bn surplus.”
• “So, we continue to recommend narrowers as a core position. That will be supported should “on hold” policy eventually underwrite lower volatility in global markets.”
• “At that stage, Australia will get the benefit of its high yield for risk status globally.”
• “Looking across the derivatives space, the biggest recent performance has been on the AU-US 5y5y swap spread, which after lagging through 2022 and early 2023, has begun to narrow at a faster rate than other spreads. We expect there might be some profit-taking, however history shows that there is scope for significant performance relative to the physical.”