Westpac: Can EFPs Continue To Narrow From Here?

Westpac “expect recent performance to slow, although we would not expect significantly wider spreads either.”

• “EFPs have narrowed rapidly in recent weeks and accelerated last week as outright yields move to new highs. This inverse relationship of swap spreads with outright direction is evident across the curve which, should the current bearish outright momentum continue, suggests that swap spreads can squeeze lower still.”
• “However, it is our view that, until an RBA easing cycle is imminent, that spread narrowing should slow. Indeed, over the past week, if anything, with RBA pricing shifting hawkishly, macro support for further narrowing has weakened. Of course, there is a not-insignificant risk of the RBA introducing QT in coming weeks, and that is getting factored-in as well.”
• “So, we are not arguing for a push much wider either, rather that receive-side positioning might be inclined to take some profits at current levels, especially ahead of FY year-end for 3 or the 4 major banks in Australia. That would coincide with a slowing in the recent rapid narrowing of the AU-US 5y5y swap spread as well. As such, we expect there might be a widening of the 3-10yr EFP box in coming days.”