Westpac Look To Pay 3-/5-/10-Year Fly, But Not At Current Levels

Westpac note that if their view of "a negative quarterly GDP reading is correct, then 1Y1Y can probably fall a bit further… However, we are expecting a rapid recovery, not a double dip recession, so what does that mean for maturities further out along the curve. The relationship between the 3-/5-/10-Year butterfly and 3-/10-Year swap curve has been very directional of late. So, if we think that the curve flattening of recent weeks is set to slow, does that mean that the 5-Year will begin to outperform? History suggests that the 3-/5-Year curve dominates the fly. So, if recent price action is a guide, then the answer is yes. However, we think that the fact that tightening is likely to get pushed out should see the 3-Year maturity outperform the 5-Year maturity over time. That would limit the butterfly performance. At current levels we would not be paying the 5-Year maturity on a fly, but look for a better entry point."