Westpac expect "AU bonds to............>

AUSSIE BONDS: Westpac expect "AU bonds to outperform US counterparts, especially

during US-led sell-offs within the range. That is because of the "game changer"

implied by Westpac's independent rate hike. We saw pricing for the RBA fall from

a 30% chance of a 25bp hike by the second half of '19, to a 20% chance. That

chance will diminish further should the other major banks follow with similar

moves. We saw the 3-10yr curve bull steepen slightly & the AU-US 10yr bond

spread move to a new inverse level. Our curve view continues to be based on a

continuation of the med term flattening theme, meaning that periodic steepening

impulses should be faded. With the chance of other independent rate hikes being

high, we suspect we will get more opportunities to do just that in coming weeks.

We would have even more confidence if the steepener was a bear steepener, led by

offshore outcomes. The potential for the Fed to re-emphasise its current median

profile, implying a more hawkish outlook than is currently factored-into the US

front end, combined with a higher prob. that the mkt will factor-in a more

dovish RBA profile, are the keys to exp. further AU-US 10yr spread narrowing, so

the med term -40bp target is still intact."