AUD Swaps: Spread correction compresses box; NatWest Kanga

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The downward correction in long AUD swaps spreads is extending and flattening the 3s/10s box spread. NatWest issued a 3y Kangaroo Bond.

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  • Short forward flow; Long spread correction compresses box

  • Will RBA pause in October?

  • New issues

 

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Short forward flow; Long spread correction compresses box

The AUD rates market is starting the week firmly on the back foot after a stronger than expected US non-farm payrolls report triggered a sharp sell-off late on Friday. In late morning Sydney trading futures implied yields are up to 15.5bps higher and the 3s/10s futures curve is 2.5bps flatter at 18.5bps

 

Swap rates are higher and the curve is bear flattening on the back of the underlying move. There has been very little in terms of activity apart from a deal in the 1y1y forward around 3.46-3.465%.

 

Swap spreads have narrowed on the sell-off. In the long end the 10-year EFP is now down over 10bps from the 51bp peak reached about a month ago. The 3s/10s box spread has been compressing as the long spread has corrected narrower and it has dipped below 12bps for the first time since mid-June to its lowest point since the last futures roll. The 3- and 10-year EFPs are currently marked around 28.625bps and 40bps.

 

 

Will RBA pause in October?

The RBA delivered the fourth consecutive rate hike of the current monetary tightening cycle last week, taking the cash rate target to 1.85%, its highest point since April 2016. The Bank’s accompanying statement was less hawkish than that issued in July and observers noted the significance of the removal of the contention that the latest hike represented “the withdrawal of the extraordinary monetary support that was put in place to help insure the Australian economy against the worst possible effects of the pandemic.”

 

In a research note issued Friday the rates strategy team at Bank of America noted that, “The rates market interpreted the changes to the RBA's August statement as less hawkish compared to guidance in July … While the statement was still hawkish overall, the RBA's acknowledgement of greater downside risks to the outlook (domestic and global), confidence on peak inflation later this year and more conditionality on hikes … were viewed as less hawkish inclusions.”

 

BoA expects another 50bp rate hike in September then a pause in October. It added, “The risk to our RBA view would be from a mildly dovish shift to 25bps steps over September and October. We still expect a 50bp hike in November to 2.85% following an upside surprise to 3Q CPI relative to RBA forecasts … We do not have cuts in our profile at this point despite the market's view of modestly lower rates from mid-2023.”

 

 

New issues

  • NatWest Markets PLC issued a AUD600m 3-year Kangaroo Bond through joint leads ANZ, Deutsche Bank, Mizuho, NAB, NatWest and Westpac. It pays a semi annual 5.0546% coupon and matures Aug 12, 2025.

     

  • Oversea-Chinese Banking Corporation Ltd sold a AUD500m 3-year Domestic FRN through CBA. It pays 3m BBSW + 82bps and matures Aug 11, 2025.