Westpac note that "AU bonds have.......>

AUSSIE BONDS: Westpac note that "AU bonds have generally outperformed during

bearish UST moves. That was evident again last week, as the benchmark AU-US 10yr

bond spread moved toward -50bp for the first time in more than 3 decades.

However, the spread has narrowed rapidly and might be due for a correction near

term. Indeed, we saw some profit-taking on AU outperformance trades toward the

end of last week. A correction would be supported by our view that enough has

been priced-in for the Fed & that US 10yr yields have shifted sufficiently to

reflect that expectation. Medium term, we exp. the usual AU-US relationship to

continue & will still be looking to fade any sustained AU underperformance. That

will be supported by the AUD looking relatively cheap on a number of crosses,

most important vs. Yen. If that were to emerge, then we would also expect the AU

3-10yr futures spread to flatten back in to the old 50-60bp trading range.

Outside of offshore support, a period of consolidation and range-trading has

also seen the curve flatten in the past. From an outright perspective, we see

3yr futures as just a touch above midrange, with selling likely above 97.95.

10yr futures have exhibited very solid support around 97.20."