Westpac On Pricing Surrounding The ACGB Apr '24/Nov '24 Spread

Westpac note that "over the past week, short-maturity ACGBs were bid up as cash was put to work, that has been behind the squeeze higher in 3-Year bond futures, which are at their highest levels since mid-March. The price action reflects the significant amount of cash looking for some yield. The volatility in the ACGB Apr '24/Nov '24 spread is likely to remain a feature, at least until the RBA announces its decision on whether to extend its YCC to ACGB Nov '24 at its July Board meeting. While those of a more hawkish nature would suggest that the much better than expected economic outcomes should see a shift in the RBA's thinking, it is Westpac's view that the improvement is still not sufficient for the RBA to be confident enough in its expectations/forecasts to shift gears. Indeed, we think that from a signalling perspective "holding the line" on YCC is the more sensible policy. However, the market is not yet with us on this one. Monitoring the evolving likelihood of an extension by assuming that the difference in ASW between ACGB Nov '24 and ACGB Apr '25 (6.6bp) is largely a function of YCC probabilities. So at present it suggests that if there is no extension the yield could rise 6bps, while the yield would fall by 18.4bps if it was to be targeted at 10bps. We have plotted this relationship over time and it suggests there is currently a 35.8% chance of an extension, although that has been rising recently."