AUD Swaps: CPI shock; Swaps given after earlier bid

• Bond futures rebound as inflation growth weaker than expected

• Swaps offered after earlier bid

Click here for SDR AUD IRS trades

Bond futures rebound as inflation growth weaker than expected

Inflation in Australia grew slower than economists had expected, driving a rally in the AUD rates market.

Official data released today showed that inflation was 5.4% in June, down from 5.5% in May and matching the market’s expectation. However, it grew by 6% year-on-year in the second quarter, down sharply from 7% in the first quarter and below consensus of 6.2%. Compared to the first quarter, inflation was up by 0.8% in the second quarter, after 1.4% of growth in 1Q and forecast of 1% of growth.

AUD bond futures were a few ticks lower in early-morning domestic trading as they tracked the move in the USD rates market in overnight trading. Slower-than-expected inflation growth then drove a rally so that 3-year bond future was up by 11-ticks soon after the data. It was up by 7-ticks at 96.11 at mid-day, and the 3s/10s futures curve was 5bps steeper at 11.5bps.

Swaps offered after earlier bid

Swappers have been caught off-guard too. 10-year swaps traded 5.5bps higher at the open, but changed hands in a tight range around 4.4475% after the data. These compared to previous close of around 4.4725%. The reaction at the front-end has been wilder. However, a dealer said the lack of real trade flow also contributed to a bigger swing in prices. 3-year was paid up 2.5bps to 4.325% in the morning, but was quickly offered down to 4.2325% after the CPI shock.

5-year EFP widened out by 1.25bps to 41.5bps, and 3- and 10-year EFPs were 0.75bp tighter at 34bps and 44.5bps respectively.