Westpac Not Looking To Receive 3-Year EFPs Quite Yet

Westpac note that the current "good demand for short-dated physical paper (part of the term structure where AOFM is loath to issue into, and is also a maturity target for those with growing cash balances), along with the broader backdrop of a significantly lower FY2022 borrowing program than was the case at MYEFO, and the fact that there is significant "curve" to take advantage of, combine to see 3-Year futures bid up and 3-Year swap EFPs widening up through 10bp, to their widest level since the flash crash in late February/early March, and before that, just over a year ago when the pandemic-led fiscal response sparked the trend toward inverse spreads which came to define 2020. The question is how much further these spreads can widen? There might be some further upside as fair value considerations become a futures focus ahead of the 15 June futures expiry, however we think the broader macro theme will be supportive of carry-related receive-side flows taking advantage of stable RBA policy messaging for the foreseeable future. The hedging of TFF flows will also be important over this period, with ADIs still to drawdown A$90bn of this facility before 30 June. Hedging this should put some further receive-side into the market. The 20-25bp 12 month roll for 1y1y and 5y5y are important RV considerations. So we would be a better receiver on an EFP basis on any move toward 13-15bp on the 3-Year EFP."