JGBS: Cheaper, Subdued Session With US Tsys Out

The AU-US 10-year cash yield differential currently stands at -20bps, positioned in the lower bound of the +/- 30bps range that has largely held since November 2022.

• 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, currently -17bps.
• 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 bottom of the range at ~-34bps.
• 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 Vs. Fair Value (%)

Source: MNI - Market News / Bloomberg

While Q1 GDP was weaker than expected and slower than Q4, it was impacted by extreme weather events in the quarter which impacted exports and domestic demand. Thus there is likely to be some positive payback in Q2 and so a reaction by the RBA to the weakness at its July 8 decision is not assured. Given special factors, it is likely to watch the more timely monthly data closely for signs of a Q2 recovery. 

Australia GDP %

Source: MNI - Market News/ABS

• Real GDP rose 0.2% q/q in Q1 leaving annual growth stable at 1.3% but domestic demand slowed to 0.2% q/q & 1.9 y/y from 0.7% & 2.2%. Q4 GDP rose 0.6% q/q. The largest contribution was from household expenditure at 0.2pp, while exports detracted 0.2pp. Inventories added 0.1pp.
• The ABS noted that shipments of LNG and coal were particularly impacted by “severe weather disruptions to production and shipping”, which is likely to have rebounded over Q2. Weather impacted mining, tourism and shipping.
• Household spending rose 0.4% q/q to be up 0.7% y/y down from Q4’s 0.9% y/y. There was a pickup in the savings rate to 5.2% from 3.9% due to higher government income support and insurance claims in Queensland.
• Government consumption was flat with annual growth slowing to 3.4% y/y from 5.0% in Q4, but is also likely to rebound. There was less spending on electricity rebates and benefits but a pickup in defence. Investment by public corporations fell sharply but was still up 7.1% y/y.
• Private capex rose 0.7% q/q to be up 2.3% y/y driven by construction, while equipment contracted for a second straight quarter.
• Weak investment resulted in lower imports of capex goods which drove the 0.4% q/q decline in total imports which are now up only 0.4% y/y. The drop added 0.1pp to growth resulting in a net export detraction of 0.1pp. 

Australia domestic demand y/y%

Source: MNI - Market News/ABS

Zhejiang province has issued CNY1.6 billion of special bonds specifically for purchasing existing commercial housing, Yicai news agency has reported. Industry insiders said although the value amounted to only 3% of the special bonds issued by the province in total, the move had significant policy implications and the proportion may rise as related projects improve. The bonds were rated AAA and backed by provincial government credit, and would support eight affordable housing projects in Huzhou, Wenzhou, and Jiaxing. Zhejiang’s initiative provides a replicable model for de-stocking efforts in lower tier regions, according to Yan Yuejin, deputy director at E-house China Research Institute, who noted third- and fourth-tier cities face high housing inventory and slow sales.