Westpac Delve Into Curve Dynamics Around RBA Rate Hikes

Westpac note that “one of the reasons that the 2-/5-Year swap curve has been very stable until the RBA’s hawkish pivot last week is because until then we had been presented with a better understanding of the RBA’s potential size and pace of delivering hikes, thus the belly of the curve all shifted higher at roughly the same rate. However, should the short, but very sharp, policy cycle that we expect be delivered, then we expect that the 5-Year maturity should outperform its shorter counterparts, flattening the 2-/5-Yer curve. While each historical cycle has different features, it can often be useful to see what lessons can be learned from previous price action. The curve tends to flatten in an accelerated fashion as we get closer to the first (well anticipated) hike. We expect that to occur this time around as well. Beyond that, given just how much is already priced-in their will be countervailing influences that will probably keep the curve from narrowing significantly, although that remains our bias. The flattening message is equally important for the 3-/10-Year bond curve ahead of the hike, however beyond that the average move is for the curve to re-steepening by around 25bp after the first hike.”