Westpac: The Current Flattening Trend Has Further To Run

Westpac look at the 2-/5-Year swap curve and the 3-/10-Year ACGB curve 6 months before and after the first rate hike in the hiking cycles since the RBA adopted a formal inflation targeting approach to policy. “As would be expected, the front end leads the 2-/5-Year swap curve flatter before it goes broadly sideways following the first hike. That is unless the RBA has to accelerate its cycle beyond all prior expectations (not our view for the upcoming cycle). The broader bond curve also reacts in a similar way, although the post first hike steepening is very evident as a strong impulse. Given the degree of pre-emption of the current cycle, this will likely occur again, although that is a trade for the second half of the year.”