AUSSIE BONDS: AU-US 10Y Diff Sits Near Bottom Of Range

At the Tokyo lunch break, JGB futures are weaker, -43 compared to the settlement levels, hovering just session lows.

• Outside of the previously outlined trade balance data, there hasn't been much by way of domestic drivers to flag.
• Today’s heavy session aligns with US tsys, which are trading 2-3bps cheaper in today's Asia-Pac session as risk bounces on US-China officials citing 'substantial progress' made from weekend trade talks held in Switzerland. US Treasury Secretary Bessent said there had been 'substantial progress' in the two days of talks with China and that further details would be shared today.
• “Japan won’t accept any initial trade agreement with the US that excludes auto tariffs, according to Prime Minister Shigeru Ishiba. Ishiba on Monday made his stance clear when asked in parliament about the possibility that Washington might urge Tokyo to strike a provisional agreement that doesn’t address US tariffs on car imports.” (per BBG)
• Cash JGBs are 2-8bps cheaper across benchmarks, with a steepening bias. The benchmark 10-year yield is 4bps higher at 1.409% versus the cycle high of 1.596%.
• Swap rates are 2-6bps higher, with swap spreads mixed.

The AU-US 10-year cash yield differential currently stands at -6bps, positioned near the middle of the ±30bps range that has largely held since November 2022.

• Moreover, a simple regression of the 10-year yield differential against the AU-US 1-year forward 3-month swap rate (1Y3M) differential over the past year suggests the current spread is close to fair value, estimated at -8bps.
• The 1Y3M differential, a key gauge of expected relative policy trajectories over the next 12 months, has traded within a 40bp range this year and is currently near the middle of the range at ~-15bps.
• In early February, the 1Y3M differential had declined approximately 95bps since mid-September 2024, falling from +60bps to -35bps. 

Figure 1: AU-US Cash 10-Year Yield Differential (%)

Source: MNI – Market News / Bloomberg

• China bond futures have started the week weaker with the 10YR down -0.15 108.88 and is approaching the 20-day EMA of 108.85.  
• The 2YR is flat to last Friday's close of 102.35 below the 20-day EMA  of 102.39.
• China's government bond yields have been stable with the CGB 10YR at 1.62%, where it closed on Friday.  
• Key data out this week will be Aggregate Financing, New Loans and FDI but the market will be watching closely for further news of US and China discussions.  
• This week in terms of key issuance, China will issue 100 Billion Yuan 2035 Bonds,  85 Billion Yuan 2030 Bonds and 145 Billion Yuan 2032 Bonds on the 14th.