Westpac: We Remain Better Sellers

Westpac note that their “RBA outlook remains far more dovish than the current market pricing. The market continues to debate the chances of the RBA hiking at the June meeting, with the prior consensus that they would begin with a 15bp shift also under increased scrutiny. The fear continues to grow that the RBA will remain “patient” for too long, hence prolonging the tightening cycle and placing upside risks on the terminal rate, which is currently higher than the projected Fed peak. While we do not agree with that contention, we also do not expect a shift in the forward cash profile anytime soon, especially as the market is being driven by the global price action more so than domestic conditions. Beyond the front-end pricing, the focus is on how high bond yields can go? While the moves of the past 2-3 weeks have been rapid and aggressive, and valuations look stretched, there is little reason to expect that we have seen the highs in nominal yields. One contributing factor is that long end real yields have not significantly shifted, which is something the central banks would expect. Also, long end inflation expectations have not adjusted lower yet, despite the aggressive tightening cycle factored in. That suggests nominal yields can move higher still.”