Westpac: Delta-Variant Focus Will Dominate Curve Pricing

Westpac highlight that 10-Year part of the curve has outperformed recently, "with the curve out to that maturity flatter and longer maturity segments steeper. That reflects both the re-calibration of medium-term growth prospects as well as the re-evaluation of inflation risks in the context of more reactive monetary policies. The market is now far more confident that central banks will not allow inflation expectations to become untethered, while also expecting that conventional policy rates will not need to be shifted much to achieve their goals. That is keeping the belly of the curve under pressure, with term structures already responding as if policy rates were far tighter than they already are. The extra overlay is the surge in the COVID delta-variant globally, which will also contribute to keeping yields low and curves flatter than they might otherwise be. So those looking for steeper curves on talk of taper are likely to be disappointed, at these in the near term. We are still looking for triggers to reset steepeners, however there are few catalysts at present."