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The AU-US 10-year cash yield differential currently stands at -20bps, positioned near the bottom 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 slightly below fair value at -18bps.
• 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 ~-35bps.
• In early February, the 1Y3M differential had declined approximately 100bps since mid-September 2024, falling from +60bps to -40bps.

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

Source: MNI - Market News / Bloomberg

Oil prices are moderately lower during today’s APAC trading having already priced in some optimism on the outcome of US-China trade talks this week. Commerce Secretary Lutnick said that the Geneva Consensus was agreed to but it is now up to both presidents to agree to its implementation which could also allow further talks to occur. The focus had been on easing export controls.

• Oil prices fell slightly on Tuesday as the market became impatient waiting for a US-China announcement. They are slightly down again today ahead of US CPI data but off their intraday lows with WTI -0.1% to $64.93/bbl after a trough of $64.60, while Brent is -0.1% to $66.78/bbl following a fall to $66.47. The USD index is up 0.1%.
• The EU is putting together a new package of sanctions including a sharp reduction in the G7 price cap for Russia’s oil exports as its drone attacks on Ukrainian cities have escalated. There had been hope that a ceasefire may have enabled sanctions to be eased.
• Bloomberg reported that US oil inventories fell around 400k barrels last week, according to people familiar with the API data. Product stocks were higher with gasoline up 3mn and distillate 3.7mn. The official EIA data is out Wednesday including gasoline demand.
• Later US May CPI prints and is expected to show a 0.1pp pickup in both core and headline to 2.4% y/y and 2.9% y/y. It will be monitored for signs of any tariff impact. The US May federal budget is also released. ECB’s Lagarde, Lane, Cipollone and Buch appear today. 

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.