ASX Rates Highlights Q1 – January to March 2022
Interest rate futures, OTC and Benchmarks insights – Q1 2022
We are pleased to provide the ASX Rates Highlights Q1 report and the full chart pack for the period January to March 2022.
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 April meeting, the RBA struck a more upbeat tone by removing key language from its statement that it was ‘prepared to be patient’ in monitoring the evolution of inflation in Australia. The market took this as a signal that the RBA may be prepared to increase rates sooner than previously acknowledged. The short end sold off in response with parts of the curve down as much as 25bps on the day.
Rates futures volumes were down 2.8% vs Q4 2021 and 15% when compared to the same period last year (Q1 2021). Total Open Interest was 2,897,167 contracts as at the end of the quarter, down 2.3% vs the end of Q4 2021 and down 2% when compared to the same period last year (Q1 2021).
The lower volumes were primarily driven by reduced activity in the 10 Year Bond Futures with Open Interest in the contract down 9% vs Q4 2021 and down 23% vs the same period last year (Q1 2021). Open Interest in the 10 Year Bond Future has gradually declined from its peak of around 1.6 million contracts in August 2020, following reduced levels of AOFM issuance.
The 3’s10’s curve flattened over the quarter reaching a low of 0.25% on 29 March before recovering somewhat to finish the quarter at 0.35%. While the RBA have now suggested that rate hikes are a possibility in 2022, the market and the RBA appear to remain disconnected in terms of the timing and extent of future interest rate rises. As at the end of the quarter the 30 Day Cash Futures (IB) curve was pricing in six 25bps hikes for 2022, taking the headline cash rate to 1.735% by the end of the year and 3.015% by August 2023.
Global bond markets sold off in Q1 as inflation pressure added to speculation around the extent and pace of future interest rate rises. In March, the Federal Reserve increased their headline interest rate for the first time since 2018 to 0.5% and signaled aggressive tightening for the remainder of 2022. The US market is currently pricing in a 50bp increase for May and expect the headline rate to reach 2.25-2.5% by the end of the year. Markets in the UK, Canada and New Zealand are pricing in a similar trajectory with headline rates all expected to be above 2% by the end of the year.
ASX is waiving fees on all 5 year Exchange for Physical (EFP) transactions until 30 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.
Global AUD OTC swap volumes grew substantially between Q4 2021 vs Q1 2022 as result of substantial growth in shorter-dated interest rate swap and OIS volumes. ASX’s OTC Clearing service has recorded total notional cleared of A$1.25 trillion in Q1 2022, up 62% vs pcp.
Continued growth in longer dated swaps: ASX has grown its activity and market share in longer dated interest rate swaps, with Weighted Average Maturity of ASX Cleared Interest Rate Swaps currently at 2.09 years. This continues to be above the long running average for the service, despite the recent growth in shorter dated swaps 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).
ASX consults on OTC fallback rate provisions and OTC product enhancements: On 21 March 2022, ASX released a consultation paper outlining proposed changes to the ASX Clear (Futures) OTC Rules and Handbook to:
The ASX public consultation website is located here.
The specific consultation paper can be found here; and the supporting proposed OTC Rulebook and OTC Handbook changes can be found here.
$1.25 Trillion
Total notional cleared in Q1 2022, up 62% vs pcp.
2.09 years
Weighted Average Maturity of ASX Cleared OTC swaps, remaining above the long running average despite recent growth in shorter-dated interest rate swaps and OIS activity.
50%
Average Cross-Margining benefit across users of ASX’s Margin Optimisation Service. Automated Futures vs OTC Cross Margining.
The key theme of the first quarter of 2022 was the continued steepening of the BBSW yield curve due to inflationary pressures and the pricing of interest rate hikes. Yields on 6-month NCDs are now trading above 70 basis points with the BBSW yield curve at its steepest point since pre-pandemic.
For Q1 2022, daily eligible volume for the purposes of calculating BBSW using the transaction based layer averaged $1.84 billion per day ($2.17 billion in Q4 2021).The continued steepening of the yield curve translated to on average of 2.4 tenors per day being formed using the transaction layer (3 tenors in Q4 2021).
The slight decrease in frequency on tenors being formed using transactions is a result of investors gravitating towards shorter dated tenors amidst geopolitical and economic uncertainty. This has resulted in the concentration of eligible volume in fewer tenors over the current period.
