Westpac: BEIs Continue To Rise Across The Curve

Westpac note that "when thinking of indexed-linked BEI positioning, we need to consider whether it is a fundamental inflation-based decision, a real yield decision, a nominal yield decision or even a broader curve decision. BEIs in Australia continued to widen at a faster pace than other global counterparts over the past month. They continue to reflect ongoing optimism, however, given that BEIs are now above 2% it does pose the question as to how much further they can rise near term. At the same time, real yields have been falling in most markets, with Australia falling at a generally fast pace. That suggests that the index-linked bonds have been outperforming nominals as the market consolidates its recent valuations but maintains a hedge against the RBA getting inflation wrong. Indeed, the beta between the two markets has been rising fast in the past month or so. If that were to continue, then it suggests that the market's repricing of near- and medium-term inflation risks is slowing. Again, that is also consistent with a broader range-trading market."