Westpac think last week's "price.......>

AUSSIE BONDS: Westpac think last week's "price action was instructive. The

domestic calendar was full of important updates. However, on the whole, offshore

sentiment remained the dominant driver of local markets, as the RBA's familiar

outlook for an extended period of unchanged rates has reduced market sensitivity

to local data. In outright terms, the 3-Year futures remain at the upper end of

their expected trading range (97.70-98.05) but, as we wrote last week, that

level is justified by the RBA's lower inflation forecasts & mkt pricing. So it

would be difficult to enter a tactical short off current levels with any

conviction. For now we recommend maintaining a range-trading mindset. We note

that the 10-Year futures outperformed by around 3-4 ticks last week, with the

3-10 Year spread contracting to the bottom of its range. However that is largely

a franking of US Tsy moves & as such, the AU-US 10-Year bond spread remains

~-30bp. We exp. it will slowly continue to narrow over coming weeks but it will

take a more hawkish Fed outlook (or, less likely, a more dovish RBA outlook) to

prompt the next major move. Even so, there is no reason to expect any spread

widening, should it occur, to be anything but short-lived."