AUD Swaps: Post-Powell offers; Spreads seen wider; Bills/SOFR to steepen

Arrow up and down Oct 2022
AUD swaps have been offered after dovish comments from US Fed. ANZ believes swap spread to stay wide while Bills/SOFR to steepen.

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  • 3y bond future spikes in early trading

  • EFPs wider despite Good 5-10y offers

  • ANZ believes swap spread to stay wide

  • AUD Bills/SOFR seen steeper

  • New issues


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3y bond future spikes in early trading

3-year AUD bond future was up by more than 10-ticks soon after market open, on the back of a positive sentiment in the market after US Fed Chair Powell’s slightly dovish comments in overnight trading.


At a Brookings Institution event, Powell said the time for moderating the pace of rate hikes may come as soon as December. The front- to belly area of the USD rates curve rallied as the hike premium was unwound, and the market shifted its pricing of policy peak rate at under 5% by May/June.


Both 3- and 10-year AUD bond futures trimmed gains in the afternoon session. In mid-afternoon Sydney trading they’re marked 5- and 3.5-ticks higher at 96.87 and 96.505 respectively.



EFPs wider despite Good 5-10y offers

Dealers noticed a strong rally in 3-year ACGBs and swaps, though swaps have been slightly underperforming and thus a wider EFP there. 3-year swaps traded down to 12bps lower in early morning domestic trading before last seen changing hands 7bps lower at 3.63%. 3-year EFP widened out by 1.25bps to 51.25bps.


Interestingly, 5- and 10-year swaps have seen busier flows than the short-end on the day. 10-year saw offered-side flows at down to 4.04% soon after market open. It was last traded 6.5bps lower of 4.07%. 5-year, on the other hand, traded 10bps lower at 3.805% intraday. EFPs are wider with 10-year up 1.5bps at 59bps and 5-year up by 2bps at 72bps.



ANZ believes swap spread to stay wide

Recently, swap spreads have widened sharply before retreating, but they are still standing at their historical wide levels. ANZ believes that swap spreads would continue to narrow from here with some limitations, according to a research piece released this week.


Indeed, the bank said swap spreads could sustain at wide levels on a more structural basis due to the large amount of bond buying that it expects banks to do. On top of that, there will be paying of swap that banks do in order to hedge the fixed-rate risk of owning bonds, exacerbating the widening move.



AUD Bills/SOFR seen steeper

ANZ also noticed that cross currency basis Bills/SOFR has decreased across the curve, compared to a month ago. However, the team now expects it to steepen from here. According to the bank, the move will be supported by the followings:


  • Australian banks are likely to be active in issuing offshore and some of this will skew towards the 10-year area of the curve.

  • Kangaroo issuance will be concentrated around the belly of the curve, due to the changing composition in demand for this issuance.

  • Japanese investor demand for SSAs in the 10-year part of the curve has dropped off, whereas central bank demand for SSAs in the belly of the curve is reasonably strong.


As such, it may become relatively less attractive to tap the USD market for 10y+ funding for other Australian issuers considering offshore issuance.



New issues

  • Australian Post raised via NAB AUD100m in 4.992%, December 8, 2027 bonds.