Halister News

(Bloomberg) -- UBS suggests three Australian interest rate trades for 2017 centered around unhedged Aussie bonds, buying compression at long end and curve flatteners, according to a note.

• Sees 10y AU-US spread bottoming at 30bp with risks tilted to downside
  • Views this level as ’fair’; however, concedes that nominal growth and base rate differentials allow for a tighter spread
• Recommends to buy Aussie bonds with unhedged FX
  • AUD can strengthen modestly in 2017 despite tighter cross-market yield spreads; terms of trade justify a stronger currency
  • Risk-reward for currency-unhedged Aussie bond purchases is most attractive for U.K. and Japanese investors
• Recommends to buy long-end Aussie vs. US (or vs. US & Germany)
  • Long-end of the Aussie curve has lagged strong performance of the 10y sector post-US election
  • Opens up opportunity to move compression trade further out the curve; trade suits relatively modest reflationary forces
• Recommends Aussie long-end flatteners vs US
  • Fade divergence in curve movements between AUD and US curves
  • Suggests 7- and 20-yr part of curve as way to capitalize on prospects of increased US stimulus and increased supply between ACGBs and USTs post the US election
• Sees 10y US treasury yields ending 2017 at 2.25%, before rising modestly to 2.50% at end-2018
  • Upside risks have clearly increased post US election with potential for steeper Treasury curve