Westpac: How Will ADI Demand For ACGBs Evolve?

Westpac note that “one of the key drivers of ACGB and Semi performance and price action is the regulatory demand from ADIs. It is our core view that this demand will favour Semi spread narrowers over the medium to long-term, accelerating as ES balances fall in 2023 and 2024. Of course, it does not just need ES balances to fall before this demand manifests itself, as ADIs will get ahead of schedule when supply is available, as it is right now. As of Dec 2021, ADIs owned far and away the most semis, followed by offshore investors and then the RBA. The mix of assets held by ADIs has shifted dramatically as a consequence of the Bank’s QE policy, with ADIs largely holding on to their Semis but selling their ACGB holdings to the RBA. The question is whether that subsequent mix within the HQLA space is sufficient. That is, will regulators encourage more buying of ACGBs given the current mix? While ADIs still own a significant slice of the semi market (44%), ADI ownership of ACGBs has plummeted to 12%, the lowest it has been since the LCR was introduced in 2015. That could skew demand during certain market phases, however, overall we still expect Semis to benefit most from this sector’s demand over coming months and years.”