Westpac: Will "Carry"-Related Receive-Side Limit EFP Widening?

Westpac note that "swap EFP spreads have continued to widen in recent days, with 3-Year EFP around 2.5bp off the early June wides and 10-Year swap EFP around 12.5bp, which is the widest since the pandemic shifted the dial back in Q120. The question is how much further these spreads can widen?"

• "For the 3-Year EFP it is clear that the pickup versus 1-Year spot is at its widest since 2018. While some of that reflects the hawkish stance of the RBA, we think that those carry considerations will continue to attract receive-side carry-related interest which should provide a headwind to further spread widening. The fact that BBSW remains anchored near all-time lows, with little prospects of it rising over the next year as liquidity conditions remain high, is also supportive of that view."
• "As for the 10-Year EFP, we think there is a greater chance that the spread continues to widen. Some of the receive-side support that might have come from 5-Year/5-Year players will slow as carry is historically low and the curve has flattened significantly. In addition, should global yields begin a renewed shift higher, it should encourage liability-managers who might not as hedged as much as they would of liked earlier in the year to push out along the curve. That would be supported by asset swappers as well."