Westpac: Will A Negative AU/U.S. 10-Year Spread Impact Demand?

Westpac note that "Japanese investors have traditionally been an important demand cohort for Australian bonds across the issuer spectrum. However, they have been noticeably absent recently, having taken profit earlier in 2021. The monthly Japanese MoF data indicates that they remain better sellers than buyers. So, it is worthwhile asking what might be the reason for that absence?"

• "One factor might be that the currency has been surprisingly weak, which would limit some potential unhedged demand. In addition, the high levels of uncertainty around the near-term outlook would also be a discouragement. Should the economy resume a rapid rise, steepening the curve, then that would be more attractive."
• "Of more pressing immediate interest, however, is the fact that the AU/U.S. 10-Year spread has moved into negative territory. That removes one of the key yield advantage comparisons that usually benefits Australia. The last time this occurred, Japanese demand was sporadic and variable. Even so, when assessed on a currency hedged basis, the comparison does not look as bad. So, we would continue to expect support from this sector to remain important over the medium term."