• NZ-AU spreads have widened sharply over the past month. The 10-year NZGB-ACGB spread is back to where it was late last year. when the RBA was still in denial about the need for rate hikes.
We think it makes sense to position for NZGB-ACGB spread tightening. The market is now pricing a significantly higher terminal rate for the RBNZ (-5.50%) than the RBA (-4.20%) even though the macro backdrops are similar.
Additionally. NZGBs are joining the WGBI at month-end which should be a near-term supportive driver for spread compression. • Risks to the trade include the potential for further divergence of monetary policy expectations (although we think this looks stretched already), continued richening of ACGBs due to HQLA-related demand, and an expected reduction in issuance after next weeks Australian Budget.
We are closing out our NZD-AUD 5y5y spread widener trade at the same time.
Buy NZGB May-32 vs ACGB 75bp 75bp 40bp 92bp -0 7bp May-32
Close NZD-AUD 5r5Y -4bp -22bp -4bp -40bp +18bp swap widener
- NAB Strategy
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