AUD Swaps: BOJ to steepen AUD basis and flatten box; RBA seen on hold

ANZ believes the latest BOJ move to steepen front-end basis and flatten the EFP box. RBA is expected to be on hold.

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  • Front-end basis curve seen steeper, EFP box seen flatter after BOJ’s YCC shift

  • RBA to pause; Light 3-7y offers

  • New issues


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Front-end basis curve seen steeper, EFP box seen flatter after BOJ’s YCC shift

ANZ has published a strategy piece following the BOJ which essentially lifted the 10-year YCC band by 50bps to 1%. The BOJ’s tweak drove a steepening in the ACGB 3s/10s curve and cheapening of bonds to swap.


ANZ sees last week’s shift as a means of smoothing the transition towards higher rates. According to ANZ, the next step for BOJ would be towards an even larger shift in YCC: either a complete removal that would result in 10-year JGB yields settling around 1%, or a switch to targeting 2y JGBs.


However, it doubts any massive selling of AUD-denominated bonds by Japanese investors even with an end to YCC, although further selloff in JGBs will put some upward pressure on ACGB yields. Elsewhere the bank reckons the end of YCC would put downward pressure on AUD swap spreads and flatten the box, but at the moment it is difficult to identify this amid the other flows affecting EFPs. Nevertheless, there will likely be less hedged buying of AUD bonds by Japanese investors, implying less paying of 3m Bills/SOFR and a steeper front-end of the cross-currency basis curve.



RBA to pause; Light 3-7y offers

On the domestic front, ANZ expects the RBA to leave the cash rate unchanged this week. However, the team would not receive outright as there is not much priced into Aug-23 OIS. Further out the curve, the team noted that markets are still pricing one more hike this cycle. If the RBA pauses, some of this will unwind. But unless the RBA is completely dovish, which is unlikely, markets will price in a reasonable risk of another move


AUD bond futures have followed the move of the US rates market, which was firmer after data. 3-year bond futures therefore rebounded by 9-ticks intraday before being marked 4-ticks higher at 96.16 at mid-day. The 3s/10s futures curve was 1bp flatter at 17.5bps.


Trading in swaps has not been busy ahead of the RBA which is due tomorrow. A dealer reported a couple of receiving flow in 7-year in a tight range around 4.3325%, down from previous close of around 4.3775%. 3-year traded in several clips at 3.75bpws lower of 4.17% at mid-day.


EFPs were mostly wider. 3-year was up marginally at just below 33.5bps, both 5 and 10-year were up 0.25bp at 42.75bps. the 3s/10s EFP box widened out by 0.25bp at 9.5bps.



New issues

  • ANZ sold via BOC HKD780m in 5.46%, August 4, 2024 bonds.


  • Select Access issued AUD110m in August 15, 2025 FRNs that pay AUD 3M BBSW + 125bps. Lead is DB.