AUD Swaps: Good 10y bid ahead of US Fed; Front-end seen flatter

Rolled flat road 21 Jun 2021
10y AUD swaps saw relatively busier paying ahead of the US Fed. ANZ sees opportunities in front-end flattener.

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  • Bond futures follow USD rates lower ahead of US Fed

  • Good 10y bid; Timid 3-5y payers

  • Front-end seen flatter - ANZ

  • AOFM sells 2033 ACGBs

  • New issues


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Bond futures follow USD rates lower ahead of US Fed

The AUD rates market has followed the USD rates market weaker today, ahead of the FOMC decision which is due tomorrow.


There was a sharp bear flattening of the USD rates curve as front-end US treasury yields rose by up to 18bps as traders revised their interest rate outlook. The market priced in terminal rate at 4.94%, up from the 4.91% on Monday, and 88% chance the Fed would hike rate by 25bps tomorrow.


In mid-afternoon Sydney trading 3- and 10-year AUD bond futures were both down 17-ticks at 97.05 and 96.64 respectively, and the 3s/10s futures curve was unchanged at 41bps.



Good 10y bid; Timid 3-5y payers

Trading in swaps in the short and belly part of the curve has not been particularly busy ahead of the US Fed. 3-year traded briefly at around 3.43% near market close, up from previous close at 3.3225%. 5-year traded 11.5bps higher at 3.665% around mid-day but was last seen changing hands at 3.535%.


10-year, on the other hand, saw some decent amount of paying. A dealer reported trades between 3.94% and 3.97% in the afternoon session, following some timid paying in a tight range around 3.95% in the morning session. These compared to Tuesday’s close of 3.835%.


EFPs were tighter across the curve as swaps have been outperforming their underlying ACGBs on the selloff. 3-year was down 2.25bps at 50.75bps, 5-year down 2.75bps at 74.25bps, and 10-year down 2.5bps at 62bps.



Front-end seen flatter - ANZ

Over the past few weeks, the front-end of the swap curve has flowed the global move and rallied sharply. However, ANZ noticed in a recent strategy piece that it is still steep relative to the USD and NZD curves. The team also identified some risks as the markets are essentially pricing in some convergence between the RBA and the Fed. That means if AUD rates may rally if USD rates rally.


ANZ therefore sees some values in front-end curve flatteners and is particularly interested in paying May OIS. “We still think it’s possible for markets to price in the possibility of a hike in May, whereas it will be more difficult to do this for the April meeting with the ongoing concerns,” it explained. It also likes getting long September 2024 bill futures as it is far out enough that it would be less affected by any bounce in risk sentiment that may push rates higher, and that it is long enough to capture any further rate cuts that would be priced in if risk sentiment deteriorates.


The risk of this trade will be if RBA decides to cut aggressively before May if the global banking situation deteriorates sharply from now on, which RBA believes will not be a likely scenario.



AOFM sells 2033 ACGBs

The AOFM sold AUD700m in 3% November 21, 2033 ACGBs at tender today, bringing the new size of the line to AUD21.1bn. Bid-to-cover was 3.87 times and average yield was 3.3491%.