Westpac: Does Curve Steepening Have Further To Run?

Westpac note that “with front end valuations volatile, it is also time to assess the Aussie curve in the context of the last tightening cycle. Looking at both the 3-/10-Year bond curve and the 2-/5-Year swap curve, we can see that the first rate hike in 2009 represented a turning point for both curves, especially the 3-/10-Year curve. That mirrors, to some extent, the price action of the fortnight since the RBA began its current cycle. The 2-/5-Year swap curve also steepened slightly, with both steepening impulses peaking after the 3rd hike in the cycle (75bp total). Beyond that, the secular flattening impulse resumed as the RBA moved rates toward, and then into, restrictive territory. We think there are some similarities with the current cycle that suggest a similar evolution is possible in the coming weeks. The recent steepening across the term structure is very similar to the above outcomes. Should the Westpac view of a 40bp hike in June be delivered, then, despite how much has been factored-in, we would expect the debate to shift to them already “getting ahead of the curve.” That will eventually shift the broader narrative back to flattening, as inflation risk gets revised lower, however, the steeper impulse probably has further to run.”