RBA: Central bank “normalisation” dominant thematic - Westpac

The “normalisation” thematic made a dramatic entry to the AU market in RBA July Minutes, where the discussion of a 3.5% “neutral rate” saw the market price in a far greater risk of RBA hikes in the near term than previously expected, notes the research team at Westpac. 

Key Quotes

“Front-end bill and bond futures moved by up to 14bp post the Minutes, with an RBA hike more than fully priced by the end of next year.”

“We believe these moves in AU outright rates are an overreaction. The sharp moves and high volumes are indicative of crowded positioning being cleared out, yet (somewhat worryingly) we have not seen any real signs of strength since then.”

“On a cross-market basis we therefore remain lingering around multi-month wides against the US. The benchmark 10yr AU-US bond spread is at about 48bp, which is highs back to October last year.”

“The AU front-end certainly looks good value here given our unchanged RBA view.”

“Also worth note, through the latest global move AU 10yr bonds have tracked the Bund sell-off very closely (and more so than the US). This should be supportive given Bunds are still a questionable proxy for AU.”

“As has been the case for some time though, the rallying AUD is a complicating factor for bond demand, and without a correction will help to keep cross-market spreads elevated.”