ASX Rates Highlights
OTC, Futures and Benchmarks – quarterly insights
We are pleased to provide the ASX Rates Highlights Q4 report and the full chart pack for the period October to December 2021.
The chart pack includes the roll volumes for ASX Interest Rates Derivatives – 3’s, 5’s, 10’s and 20’s futures by volume, session and open interest.
At its February 2022 meeting the RBA announced it will cease bond purchases from 10 February. The board acknowledged that inflation had picked up more quickly than expected and adjusted its forward inflation expectations higher. However, the board determined that it was too early to conclude inflation was sustainably within the target range and that it is ‘prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve’.
Global data and inflation largely surprised to the upside in Q4 with a number of central banks bringing forward the indicative timing of future rate rises. The Reserve Bank of New Zealand increased its headline rate in October (+0.25%) and November (+0.25%) while the Bank of England surprised the market with a 0.15% increase at the end of 2021 and another (+0.25%) in February taking the headline rate to 0.50%. Both markets are currently pricing in multiple rate rises for 2022.The Federal Reserve is also expected to raise rates 4-5 times in 2022 with inflation reaching 7% YoY (the highest reading since 1982) and unemployment dropping below the level of full employment to 3.9% in December.
Fourth quarter rates futures' volumes were up 3% when compared to Q3 2021 and down 5% when compared to the same period last year (Q4 2020). End of year Open Interest was slightly lower at 2.97 million contracts vs 3.09 million at the end of 2020.
The uplift in Q4 activity was largely concentrated in the 90 Day Bank Bill Futures with volumes increasing 55% vs Q3. The spike in short end activity was driven by global inflationary pressures and expectations that central banks will be forced to raise interest rates sooner and at a faster pace than previously forecast. In addition to this the RBA removed the 3 year Yield Target at the November policy meeting resulting in a steepening in front end rates. The 3’s10’s spread narrowed 49bps over the quarter as the market brought forward the timing of future interest rate hikes. The first rise is currently priced for June/July with another two priced in by the end of 2022 taking the headline Cash Rate to just over 1.00% by the end of the year, well ahead of the RBA’s guidance.
To recognise the one year anniversary of the 5 Year Treasury Bond Future and thank participants for their support, ASX is waiving fees on all 5 year Exchange for Physical (EFP) transactions until the 30th June 2022. The fee holiday will support the growth of the EFP of mid curve bonds and swaps to the 5 year future, facilitating a more efficient and effective hedge for mid curve treasury exposures.
The December roll market was orderly, trading in 1bp and 0.4bp range respectively in the 3 and 10 year futures.
Global AUD OTC swap volumes remained steady between Q3 2021 vs Q4 2021, however continue to be lower vs PCP due to a continuation of subdued shorter-date interest rate swap and OIS volumes, as a result of the low rate environment and yield curve control. ASX’s OTC Clearing service has recorded total notional cleared of A$790 billion in Q4 2021, in line with the quarterly average for calendar year 2021.
ASX has grown its activity and market share in longer dated interest rate swaps, with Weighted Average Maturity of ASX Cleared Interest Rate Swaps growing 23% to 2.41 years across the 12 month period ending December 2021 with market participants taking advantage of ASX’s lower total cost of clearing and the available cross-margining offsets (average 50% cross-margining benefit across users of ASX’s Margin Optimisation service).
The key theme of the fourth quarter of 2021 was the continued steepening of the BBSW yield curve due to inflationary pressures and a change in rate expectations. At the beginning of 2021, there was little shape to the BBSW curve with tenors 1-6-month all setting below 3 basis points. In December 2021 yields on 6-month NCDs were printing above 20 basis points.
For the fourth quarter 2021, daily eligible volume for the purposes of calculating BBSW using the transaction based layer averaged $2.17 billion per day ($1.29 billion in Q4 2020).
The steepening of the yield curve led to an average of 3 tenors per day being formed using the transaction layer ($1.71 billion in Q4 2020).
The increased frequency on tenors being formed using transactions was a result of renewed activity in longer dated tenors as investors sought longer dated, higher yielding paper.
In December, ASX implemented enhancements to the calculation methodology of the quarterly Bond Futures Expiry. The purpose of these enhancements is to facilitate a robust and resilient settlement methodology which maintains the integrity of the Bond Futures Expiry as a significant benchmark. Further details on the enhancements can be found at the following here.
The introduction of uncleared-margin rules for OTC derivatives in Australia is leading market participants to consider central-clearing solutions.
In recognition of the one year anniversary of the 5 Year Treasury Bond Future launch, ASX are waiving fees on all 5 Year Exchange For Physical transactions to 30 June 2022.
