AUSSIE BONDS: Bear-Flatter But Narrow Ranges Ahead Of US CPI
Jun-11 03:14
ACGBs (YM -4.0 & XM -1.5) are weaker after dealing in narrow ranges on a local-data-light session.
- There has been limited market reaction to the headlines coming from US-China trade talks, with the main takeaway being that the Geneva consensus was also agreed to by both sides. The US side appeared confident that this would see rare earth flows increase from China to the US (leaders from both China and the US still have to agree to implement the outcome of the talks).
- Cash US tsys are ~1bp richer in today’s Asia-Pac session ahead of today’s CPI data. Analyst unrounded estimates see core CPI inflation accelerating mildly to 0.27% M/M (median, 0.28% average) in May after 0.24% M/M in April. (See link)
- Cash ACGBs are 2-4bps cheaper with a flatter curve and the AU-US 10-year yield differential at -20bps.
- Today’s auction of A$1000mn of the Nov-32 bond saw the weighted average yield print 0.65bps below prevailing mid-yields. However, the cover ratio declined to 3.2100x from 3.4786x in the previous auction.
- The bills strip has bear-steepened, with pricing -1 to -3.
- RBA-dated OIS pricing is firmer across meetings today. A 25bp rate cut in July is given a 79% probability, with a cumulative 72bps of easing priced by year-end.
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AUSSIE BONDS: AU-US 10Y Diff Sits In The Middle Of Range
May-12 03:08
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 Lower at the Open
May-12 02:48
- 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.
AUSSIE BONDS: US-CH Trade Deal Induced-Risk-On Weighs
May-12 02:27
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.
