📝 Fade Strength In AGB Yields, But Expect Curve to Continue Flattening: Westpac Strategy

The market has clearly assessed the RBA’s tone as dovish. The Board’s decision to remove the sentence “Given the current inflation pressures in the economy, and the still very low level of interest rates, the Board decided to move by 50 basis points today” from the final paragraph will put into question whether they will shift to a 25bp pace at the August meeting. That is not our current forecast, and we might need to wait for the discussion in the Minutes to assess that likelihood.

As to where to from here, the market discussion is likely to focus on whether the RBA’s resolve for a rapid front-loading of hikes is waning, and if so, whether that is a bullish or bearish signal for outright yields. We suspect that some near term bullish impetus will not be sustained when we see the next inflation prints. So we remain better sellers into strength, but expect the curve to continue to flatten. This should be a positive for the 10yr AU-US bond spread, although we would not expect too much outperformance given the current risk environment.

- Westpac Strategy