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Westpac: Little Scope For Even More Hikes To Be Factored-In.

AUSSIE BONDS

Westpac note that they have “responded to the RBA’s hawkish shift by significantly adjusting our expectations for the tightening cycle in 2022. We now expect 115bp of rate hikes in 2022, with moves at every meeting bar September and December, once the cycle gets underway in June. Even so, the market is priced for an even more aggressive profile, with a year end cash rate of 2.25%, and a terminal rate beyond that of almost 3.50% by mid-2023. While we believe that is far too aggressive a profile, we believe it reflects more than just pure policy expectations - one being the risk that the RBA doesn’t follow through sufficiently on its hawkish pivot. However, there is a limit to how much further the market could shift front end pricing and we think that limit has been reached. The fact that the is a slight cut factored-in for 2024 probably reflects that sentiment as well. As such, we expect that the very front end pricing should stabilise from here. We further expect pricing to move more toward our expectations once the tightening cycle is underway. That has implications for the term structure as well. In the same way that the U.S. 2-/10-Year curve has been bear steepening of late, an anchored front end also shifts the Aussie 3-/10-Year bond curve risks in that direction as well, slowing the more secular curve steepening that has been underway for months. However, at the 2-/5-Year part of the curve, we think that the flattening has a chance to perform after going sideways for a long time.”

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Westpac note that they have “responded to the RBA’s hawkish shift by significantly adjusting our expectations for the tightening cycle in 2022. We now expect 115bp of rate hikes in 2022, with moves at every meeting bar September and December, once the cycle gets underway in June. Even so, the market is priced for an even more aggressive profile, with a year end cash rate of 2.25%, and a terminal rate beyond that of almost 3.50% by mid-2023. While we believe that is far too aggressive a profile, we believe it reflects more than just pure policy expectations - one being the risk that the RBA doesn’t follow through sufficiently on its hawkish pivot. However, there is a limit to how much further the market could shift front end pricing and we think that limit has been reached. The fact that the is a slight cut factored-in for 2024 probably reflects that sentiment as well. As such, we expect that the very front end pricing should stabilise from here. We further expect pricing to move more toward our expectations once the tightening cycle is underway. That has implications for the term structure as well. In the same way that the U.S. 2-/10-Year curve has been bear steepening of late, an anchored front end also shifts the Aussie 3-/10-Year bond curve risks in that direction as well, slowing the more secular curve steepening that has been underway for months. However, at the 2-/5-Year part of the curve, we think that the flattening has a chance to perform after going sideways for a long time.”