Westpac: Can 10-Year EFPs Widen Further?

Westpac note that "the question is whether 10-Year EFPs can widen further on the current RBA re-pricing and subsequent shift wider in BBSW-OIS? In recent years the relationship between 10-Year EFPs and 10-Year ACGB yields has been proportional, widening on bond sell offs and narrowing during rallies. That changed back to the traditional inverse relationship after yields peaked on the global reflation theme earlier this year, and broadly speaking we would expect that traditional relationship to re-exert itself the higher outright yields go. However, the widening of the past fortnight shows that as we re-calibrate to a new normal for outright yields there will be periods in which the beta between the spread and outright yields moves back toward one. To that extent, we expect beta to slow in coming days. We think that 10-Year EFPs will be capped in the 20-25bp region."