Westpac: What Is Driving AU Rates Underperformance?

Westpac note that they “entered an ACGB-U.S.Tsy 10-Year spread narrower at attractive levels on 3rd November last year but recent price action has seen us exit the position. In our view, the trade is still likely to perform over the medium term, but current conditions are not conducive. In general, as volatility rises, the risk premium associated with AU bonds tends to rise relative to the U.S. The same can be said when we view the volatility through the lens of global risk aversion, when U.S. Tsys benefit from “safe haven” or “flight-to-quality” support. As a result, most long end cross market relationships are at their wides. The exception is for those at the very short end, where a re-calibration of the policy risks between the RBA and the Fed has seen the local market outperform.. We think that is likely to remain a theme, given how much is factored-in for the RBA.”