Westpac: EFPs Will Remain -ve, 3-10yr EFP Box Should Move +ve

Westpac note that "swap EFPs have been "normalising" since they reached their record tight levels in late-Aug. A number of well-known factors drive the current swap-bond term structure, not the least of which is the large amount of underlying bond issuance and the huge amount of cash that the RBA has pumped into the system. One question is whether, since bond issuance turned spreads negative, then an extensive RBA purchase programme might reverse that process. The trade-off, is that there is little incentive for significant payside flow at present, given the very strong message from the RBA that cash rates will not be raised until we are closer to full employment. So that leaves the dominant flow being receive-side for carry purposes. The "sweet spot" for those trades is now further out the curve, such as the 2y2y and 2y5y points. We think that should keep spread across the term structure capped below 0bp. That would gain support if the RBA does not undertake an enormous QE programme. We would expect both 3-Year & 10-Year EFPs to stay within the 0 to -10bp range for now, although we would expect the 3-10yr box to remain positive given that the longer end of the curve should be the main focus of the RBA's purchases."