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Westpac's Overview On the ACGB Space

AUSSIE BONDS

Westpac note that "it has been our view for some time that we are currently in a consolidation phase following the re-pricing of inflation and policy risks in Q121. In addition, our view has been that rallies will be short-lived and shallow. We are still of that view, so the recent U.S.-led rally should be seen in that context. Indeed, if H221 provides a clear improvement in the economic outlook, as we believe, then we think that yields can rise toward 2% at the 10-Year maturity, so current levels represent an opportunity to reset or add to strategic shorts. Over the next 1-3 months, however, we expect that the range-trading theme of recent months is the most likely evolution for price action. Under that scenario, in the past, the AU curve has slowly flattened and the 10-Year AU-U.S. bond spread has generally narrowed. We think that is a likely scenario in coming months."

  • "The question is whether the 10-Year AU-U.S. spread will be able to move below 0bp on a sustained basis, as it did throughout most of 2018 and 2019. With both the RBA and Fed cash rates at their effective lower bounds, and unlikely to be shifted any time soon, any sustained outperformance is extremely unlikely. However, the conditions for good support of Australian bonds are still in place. AU bonds still offer good value versus peripheral Europe and other AAA nations. The latter is even more apposite given that S&P has moved Australia's sovereign credit rating back to AAA/stable from a negative outlook. To put that in an even broader context, US$14tn of bonds still exhibit a negative yield, so "yield enhancement" support still favours the local bond market. In addition, for those undertaking unhedged positions the AUD is historically undervalued. When we add the fact that we will have negative net issuance of ACGBs over an extended period given the RBA's QE, then there is scope for further outperformance."
MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com
MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com

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