Westpac: Can The Flattening Trend Reverse Near Term?

Westpac note that “the flattening of curves and curve segments across the term structure over recent months is entirely in line with previous RBA hiking cycles. But what is the post-hike message? At the front end, again unless the cycle is much larger than initial factored in, the implication is that the curve is likely to stop trending and becomes a range-trade. We think there is a strong likelihood that the curve could behave in a similar way. However, given that there is more factored-in for the RBA than we think will eventually be delivered, there is scope for the 2-/5-Year curve to bull steepen in the coming months. For the broader curve, however, there is more historical evidence that the curve can enter a steepening phase relatively quickly after the first hike. That would again be supported by a quick re-calibration of front-end pricing, and further supported by an ongoing push higher in global 10-Year yields. However, given we are only at the beginning of the RBA cycle, and there is some likelihood that the RBA could follow the path of global central banks and deliver 50bp hikes, it is too early to contemplate steepeners just yet. Indeed, the experience in both Canada and New Zealand provides a relevant comparison and a cautionary tale.”