AU-US 10yr spread hits at 15 year lows but will remain narrow – Westpac

Research Team at Westpac, suggests that one very interesting aspect of current valuations and global relativities is that the AU-US 10yr bond spread has continued to narrow, albeit at a slow pace.

Key Quotes

“As we write, it is trading around 26bp, having pushed narrower from the 35-38bp level 2 weeks ago and then breaching 30bp last week.

While we have been very comfortable holding narrowers, the question is just how much further it could narrow from here, given that 25bp has been our broad target level for some time and we have consistently suggested that we would re-assess our view when that target was reached.

For now, we have seen the spread narrow slowly under two scenarios, a narrow range trade and also a US-led bearish impulse. Both of those scenarios are in line with the drivers that we have expected to support our view and are still in place. However we are concerned that marginal investor flows from offshore may be slowing at current levels.

Even so, given the global sovereign yield complex, support for the highest yielding AAA bonds will remain in place, but for now we think the market will have to get used to new levels, both on spread and outright before re-committing new risk to the position. There is certainly not much position unwinding either. So we will wait for new opportunity.”