AUD Swaps: Swaps turn offered after CPI; 1y1y/2y1y seen steeper; Box opportunity

Tyre inflation 9 Jul 2020
AUD swaps turned offered as CPI cooled. ANZ recommended to look for worst-case scenario protection. BofA took a look at potential box move.

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  • 1y1y/2y1y seen steeper; Swaps given after domestic CPI

  • BofA eyes EFP box opportunities


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1y1y/2y1y seen steeper; Swaps given after domestic CPI

The 3s/10s ACGB curve bull steepened over the past two weeks as markets priced cuts into the frontend of the curve. ANZ noted in a research piece released yesterday that its updated forecasts indicated that this slope would steepen over time. However, in the very near term, the bank has a slight bias towards flatteners. “There is a clearer case for the very front-end of the AUD curve to sell off with upcoming monthly CPI and job vacancies data. That is, with markets currently not pricing in any hikes, risks are skewed towards front-end rates selling off,” it explained. On the other hand, the near-term direction for 10-year ACGB will be largely following the 10-year USTs which is less clear.


However, the team does not believe there is a strong case to justify a trade now. Indeed, it recommended to look at opportunities that may provide the best protection against a worst-case scenario in which central banks decide to cut aggressively by the end of this year. ANZ believes the best sort of structure to consider, rather than a trade idea, would be trades such as a 1y1y/2y1y steepeners. “If we had a 2008-style easing cycle, this curve would steepen aggressively. But over time it may steepen even in a more benign risk environment as the mark has capacity to price in more cuts into the 1- to 2-year part of the curve,” it explained.


CPI released earlier today showed that it was up 6.8% year-on-year in February, down from 7.4% in January and lower that economists’ expectations of 7.2%. Therefore, 3-year bond future, which was down by almost 10-ticks in earlier trading, trimmed loss to mark 3-ticks higher after the data. It was a tick lower at 97.12 in mid-afternoon Sydney trading, and the 3s/10s futures curve was 1bp flatter at 41.5bps.


The rather surprising CPI data prompted some good activities in 3- and 10-year swaps. A dealer noticed good amount of receiving in 3-year at down to 1.5bps lower of 3.385%, after being paid up to 3.47% soon after market open. That was followed by slightly better paying when 3-year traded mostly in a tight range between 3.405% and 3.415% in the afternoon session.


CPI-driven receiving in 10-year has been relatively more sustainable. It traded 0.5bps lower after the data, and further receiving saw 10-year being traded down to 1.25bps lower of 3.9275% near market close.


EFPs were tighter across the curve. 3-year was down 0.5bp to 51.5bps, 5-year down 0.75bp to 73.5bps, and 10-year down 1.25bps at 62.25bps.


ANZ also had a look at the EFPs in the same research piece, and had an overall view that some of the concerns about recent global factors are overdone. Its bias is to receive swap spreads. However, with so much volatility, the bank said it would avoid such trades for now.



BofA eyes EFP box opportunities

Elsewhere BofA noticed that EFPs have moved close to decade highs as extraordinary volatility and concerns about the soundness of offshore banks led to 3-and 10-year spreads to widen by about 10bps last week.


The bank, however, forecast that the fundamental pressures driving front-end EFPs wider are likely to change from mid-year as a pickup in ACGB supply from July would cheapen bonds to swap. It sees a potential for 3-year EFP to tighten on cheaper bonds as net supply picks up from mid-year. On the other hand, changes to the long-term forecast could substantially lower long-term issuance which would lead to wider 10-year EFP. This would lead to a steeper EFP box. However, there exists risks for wider front-end EFPs if the Treasury retains its long-term forecast a longer path back to normal.


The team reckons the Australian government budget in six weeks would serve as a potential catalyst for adding a new position in EFPs. “The Australian government has flagged a review of conservative commodity price forecasts in the budget and the way they choose to incorporate commodity-price changes could have an outsized impact on the steepness of the swap EFP curve,” it said in a strategy piece released on Tuesday.


However, the market is still unsure about the way the Treasury will update its supply outlook, and so the bank holds off on any trade recommendation for now, but notes a potential for box trades depending on how the Treasury updates its commodity price outlook.