Westpac: Look To Fade Any Curve Steepening Impulses

Westpac note that “while the degree of hikes already factored-in makes these trades difficult, we think is time to set some risk reward parameters around our oft-repeated view that the curve flattening has further to run. But, how do we put it on, especially considering the RBA’s likely path? The 2-/5-Year swap curve has begun to flatten, but will continue to do so once the RBA is underway. The forward curve is already very flat, however we think it can move up to 25bp flatter over the next 6 months. We note the historical divergence between the spot and forward curve, meaning there is a negative roll in the position, so we are targeting a steeper entry point, which could be achieved if the RBA’s forward guidance was particularly dovish.”

• As such, Westpac recommend entering a received 6-Month/5-Year vs. paid 6-Month/2-Year swap position at 40bp, with a target of 10bp and a stop set at 50bp.”