AUD Swaps: Bond futures erase losses; Swaps better offered

• Bond futures erase losses after mid-day; Swaps better offered

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Bond futures erase losses after mid-day; Swaps better offered

AUD bond futures were marginally lower in the morning, tracking though outperforming the selloff in the USD rates market on Friday.

On Friday, US treasury yields were mostly higher as US Fed chair Powell said the benchmark interest rates might not have to rise as much as expected to curb inflation, and that “the risks of doing too much versus doing too little are becoming more balanced.”

The market interpreted a pause to come when the US Fed meets next month, although the tone remained a tad hawkish. The likelihood for a June hike has been reduced to below 15% as of Friday, while the US Fed Funds Future market priced in over 85% chance that the Fed would keep borrowing costs between 5% and 5.25%.

Both 3- and 10-year bond futures erased losses in the afternoon session and were marked 1-tick higher of 96.7 and 96.415 in mid-afternoon Sydney trading. The 3s/10s futures curve was unchanged at 28.5bps.

Trading in swaps has been light, and swap rates have been moving in a tight range around previous close. Market participants said data flow is light this week both in the US and domestically, and most of them expected a rather dull week unless the domestic retail sales for April turns out to be a big surprise at the end of this week.

A dealer noticed slightly better receiving interest across the curve with 10-year traded briefly at 1.5bps lower of 4.08% in the afternoon session. 5-year went through 0.5bp lower at 3.81% before lunch break while 3-year traded briefly between 3.6775% and 3.7%, compared to previous close of 3.7%.

EFPs were tighter across the curve. 3-year was down 0.75bps at 38.75bps, 5-year down 1.5bps at 48.5bps and 10-year down 0.5bps at 49.5bps.