Westpac: Fwd Cash Reflects Our F'cast, Marginal Yield Upside Risk

Westpac note that current market pricing has the first RBA rate hike "around December 2022, where it has been for some time, however, there has been a twist in the forward curve beyond mid-2024, where the market is pricing in a similar terminal rate as Westpac's own 1.25%. Indeed, except for the starting point - we expect the first hike in early 2023 - current pricing is very much in line with Westpac's own forecast. That contrasts with Dr Lowe's recent messaging in which he noted that "I find it difficult to understand why rate rises are being priced in next year or early 2023". It would appear that the market is assessing a skewed risk reward around the economic potentials and hence RBA policy."

• "That interestingly, translates to a flatter curve than might be expected at this stage of the cycle. The 10-Year bond yield vs. 3-Year forward cash rate spread remains near historically low levels, especially ahead of a tightening cycle, and clearly reflects confidence in the policymakers' stewardship of the economy. Even so, this RV analysis does suggest that there is near term upside to outright yields and hence the curve over coming weeks, albeit only marginally so."