Australia: Boring is beautiful for offshore Aussie bond investors - TDS

Prashant Newnaha, Senior Asia-Pacific Rates Strategist at TDS, points out that Australian investors has expressed the possibility of the RBA hiking once this year in November, but this was not a view held with considerable conviction either.

Key Quotes

“Our strongest conviction ideas were centred on AU-US spreads, in particular the 10yr nominal spread trading negative, for the AU-US 10s30s bond box to narrow and for AU 9m x 1y5y to flatten vs the US 9m x 1y5y to steepen. With the 10yr nominal spread narrowing roughly 20bps while we were on the road (from +10bps to -10bps), we would not recommend entering at current levels, but we do see room for this spread to move deeper into negative territory to ~ -30bps over the course of this year.”

“Unlike prior client visits, there was less discussion on Australian Housing and on China. Only one client entertained the possibility of the RBA cutting rates on a 2nd derivative impact of a possible Trump trade war with China.”

“At the start of our trip most levels on key metrics were trading at fair - 10yr ACGB yields, the ACGB 3s10s curve and 3yr swap spreads. As a result it was difficult expressing standalone table thumping trades on the Aussie market. That said with the RBA essentially a sideshow to ECB, Fed and BoJ developments, clients generally believed offshore factors would ultimately drive 10yr ACGB yields higher and the ACGB3s10 curve steeper.”

“On semis, clients acknowledged AA spreads were too tight vs AAA and while the risks here were viewed as assymetric, many struggled to identify key drivers for underperformance. We detailed the expansion in the CLF was a potential trigger for Banks to offload semis, but highlighted strong offshore demand working as an offset.”

“Japan's foreign bond buying did garner some interest, but this did not draw as many questions as last year. Nonetheless we reiterated our view that Japan net buying of long dated Aussie debt would persist given the risk of RBA rates on hold and potential for a more aggressive Fed this year and next.”