Westpac: Consensus Re; Cross Market No Barrier To Outperformance

Westpac note that "one of the goals of the RBA in introducing long-end QE is to lower the attractiveness of the currency. One way to achieve this is to push AU rates as low as possible across the term structure, such that the relative yield attractiveness of AU bonds deteriorates for some marginal investors. We are aware of some global investors clearly preferring US bonds over their Australian counterparts in 2019 and early 2020 when 10yr yields were as much as 80bps lower in Australia than the US. History suggests that will occur again, however we are at the beginning of this RBA-augmented cycle. So despite cross market outperformance being a consensus trade, we see little reason to fear any significant re-evaluation of these risk rewards. There are some technical supports to this view. First, the number of bonds globally exhibiting negative yields has moved above US$17tn, a new record. That is a function of global QE and the considerable slack in the global economy. It also suggests that there will still be good demand for AU bonds from those seeking yield, with AU still providing excellent value on a global reward-for-risk assessment. One aspect of this is the fact that AU maintains one of the highest-yielding AAA sovereign yields and also maintains a relatively steep yield curve, where the relativity has actually been improving recently. We think that will reverse in coming weeks."