Aussie Funding Costs Turn Lower, Putting Life Into Old Bets

(Bloomberg) -- Australian bank funding rates have started to turn lower, giving traders the confidence to return to long positions in the front-end of the local rates market.

Strategists have issued a flurry of recommendations to go long on shorter-dated interest-rate swaps, either outright or versus longer-maturity ones, betting floating rates will fall as the Reserve Bank of Australia stays on hold. These positions were upended earlier this year as surging three-month bank borrowing costs pushed up shorter-end rates.

“We think it is time to revisit curve steepeners,” Altaz Dagha, a strategist at BNP Paribas in Singapore, wrote last week in a client note. “We expect the front end to remain anchored but the long end to remain influenced by bearish sentiment in fixed-income globally.”

Two-month rates dropped to 1.91 percent at the central bank’s open-market operations for repo rates on Tuesday, the lowest level since March 16. The three-month bank bill swap fixing rate has fallen to 2.055 percent from a two-year high of 2.08 percent set on April 16.

Morgan Stanley says investors can profit from the decline in bank funding costs by receiving Aussie one-year forward, one-year swap rates.

“Money-market rates have risen substantially in Australia since the beginning of the year, with three-month bank bill rates and RBA repos trading some 40 basis points higher compared to the end of 3Q17,” Jesper Rooth, a strategist at the company in Hong Kong, wrote in a client note. “Australian repo rates trending marginally down gives us conviction to start fading this move.”

Citigroup Inc. says there’s an opportunity to go long on Australia’s shorter-maturity bonds given yields are near the top of their trading range.

Don’t expect higher bank funding levels to follow through into longer rates, Steven Mansell, Asia-Pacific head of Group-of-10 rates strategy in Sydney, wrote in a research report last week. Citigroup recommends receiving two-year forward, two-year swap rates, he said.

©2018 Bloomberg L.P.

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