Aussie Funding Costs Start to Fall, Breathing Life Into Old Bets

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.

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