AUD Swaps: 2s/5s seen steeper as RBA to hike again; Light 3-10y offers

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ANZ predicts a steeper 2s/5s curve as the RBA will likely hike again despite recent dovish stance. 3-10y swaps were offered and EFPs were wider.

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  • 2s/5s seen steeper as RBA to hike again

  • Light 3-10y offers; EFPs wider


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2s/5s seen steeper as RBA to hike again

In his speech on Wednesday, Governor Lowe emphasised the Bank’s comfort with pausing. Lowe highlighted that the RBA can take time to assess the data and how current policy settings are affecting the economy while the monetary policy is still in restrictive territory. ANZ believes that this sort of language will be difficult for market pricing to move much higher until the Q1 CPI data which will be out on 26 April.


Currently, markets are pricing in around a 24% chance of a 25bp hike next month. ANZ said in a strategy piece released on Wednesday that it would continue to hold a short May RBA OIS trade as it still presents a good risk/reward, with the prospect of Q1 CPI data being strong enough to compel the RBA to hike again.


In the next 18 months, markets are pricing-in just over 50bp of cuts from the RBA with the cash rate bottoming out just below 3% while achieving the soft-landing scenario. The team thinks it would be a very shallow and short easing cycle by historical standards, but expectations of a more significant downturn in activity would likely be accompanied by pricing for more cuts. According to ANZ, the soft landing may well happen, but it also struggles to see how this can continue to be the central scenario for markets. “At some point, if the data turn more definitively negative, more cuts are likely to be priced into the curve. This likely suggests that curves at the very front-end (between 6m and 2y) should flatten from here.” It said in the piece. While there would still be a flattening move between the very front-end and the 2-year point, ANZ also recommended to consider a steeper 2s/5s curve although something like a 1y1y/3y1y steepener could be just as attractive, “albeit more volatile with the intraday volatility in forward starting”.


Earlier this week, ANZ revised its forecast for RBA, and said the central bank would raise rate by 25bps in August. Prior to this, it had predicted hikes in April and May to reach a terminal rate of 4.1%.



Light 3-10y offers; EFPs wider

The AUD rates market was firmer today, after weaker-than-expected trade, ISM, ADP jobs data for March from the US, and despite of stronger-than-expected domestic trade data and PMI data from China.


3-year bond future was up around 4-ticks at the open, but extended gains to marked 7-ticks higher at 97.21 in mid-afternoon Sydney trading. The 3s/10s futures curve was 2.5bps flatter at 39bps.


Trading in swaps has been less active ahead of the Easter break. A dealer reported receiving in 10-year at down to almost 6bps lower of 3.7425% around mid-day. It was last seen changing hands at 3.715% after pit, but EFP there was 2.25bps wider at 52.75bps. 3-year traded briefly through 3.255% before lunch break, and then about 3.23% soon after pit. These compared to Wednesday close of 3.295%. 3-year EFP was 2.5bps wider at 44.5bps.