Westpac On The AU-U.S. 10-Year Spread Dynamics

Westpac note that "the benchmark 10-Year AU-U.S. yield spread widened briefly last week when the RBA announced its future taper, but quickly reversed course and is now below 0bp, where it has not ventured on a material or sustainable basis since early 2020. So the question is whether the spread will be able to move further through 0bp on a sustainable basis, as it did throughout most of 2018 and 2019. With both the RBA and Fed cash rates at their effective lower bounds, and unlikely to be shifted any time soon, any sustained near term outperformance is extremely unlikely, although our forecast relative cash profile suggests the conditions are again building given it is the cash spread that has historically been the dominant driver of longer spreads. Other conditions for good support of Australian bonds are also in place. Australia bonds still offer good value vs. peripheral Europe, and still provide around 100bp of pick-up to the average 10-Year of other AAA nations, which is significant in a low yield world. The latter is even more apposite given that S&P has moved the sovereign credit rating back to AAA/stable from a negative outlook. To put that in an even broader context, US$14tn of bonds still exhibit a negative yield, so "yield enhancement" support still favours the local bond market. In addition, the supportive situation in which the AOFM is issuing significantly fewer ACGBs than the RBA is buying each week will remain a feature for at least another 6 months and likely beyond."