AUSSIE BONDS: Bear-Flatter But Narrow Ranges Ahead Of US CPI

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.  

ACGBs (YM -6.0 & XM -6.0) are sharply cheaper and at Sydney session lows. 

• This move aligns with weaker US tsys, which are trading 2-4bps 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. 
• Traders continue to pare back expectations of the Fed easing this year and the next.
• Cash ACGBs are 6bps cheaper with the AU-US 10-year yield differential at -6bps.
• The bills strip is cheaper with pricing -6 across contracts beyond the first (-3).
• RBA-dated OIS pricing is slightly firmer across meetings today. A 50bp rate cut in May is given a 2% probability, with a cumulative 92bps of easing priced by year-end (based on an effective cash rate of 4.09%).
• Today, the local calendar will be empty.
• This week, the AOFM plans to sell A$1200mn of the 3.50% 21 December 2034 bond on Wednesday and A$800mn of the 2.50% 21 May 2030 bond on Friday.