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ASX Rates Highlights Q2 – April to June 2022

Interest rate futures, OTC and Benchmarks insights – Q2 2022

We are pleased to provide the ASX Rates Highlights Q2 report for the period April to June 2022 and the full chart pack.

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.

LATEST UPDATES

Interest rate futures Q2 2022

The RBA commenced raising interest rates in Q2 to combat inflation. The first rate hike occurred in May and was followed by consecutive hikes in June and July taking the headline rate to 1.35%. Further increases are expected in 2022 with the market currently predicting the Cash Rate will reach 3% by year end.

Rates futures volumes were up 9% vs Q1 2022 and 8% when compared to the same period last year (Q2 2021). Despite higher volumes, Open Interest finished the quarter lower at 2.76 million contracts, down 5% vs Q1 and down 5.5% when compared to the same period last year (Q2 2021).

Higher volumes were driven by the short end with the Cash Rate Futures up over 200% vs Q1 and the 90 Day Bank Bill Futures up 25% vs Q1. Increased volumes were a result of changing interest rate expectations and heightened volatility with the RBA raising rates at a faster pace than initially expected. Heightened volatility and lower levels of liquidity due to uncertainty (domestically and globally) around the future of interest rates and inflation led to challenging market conditions throughout the quarter. This is likely to have also contributed to lower Open Interest (despite higher volumes).

June bond roll

  • 3 and 10 Year Bond Futures traded in a 2.6bps and 1 bps range during the June roll. This was wider than previous rolls (March 1.4bps and 0.8bps respectively) and is likely reflective of challenged market conditions and reduced levels of liquidity.
  • 3 Year roll activity was down 10% in June (866k) vs March (961k), largely driven by lower Open Interest going into the roll (down 14% vs March).
  • 10 Year roll activity was down slightly in June (1.4 million) vs March (1.44 million) while Open Interest going into the roll was largely unchanged vs March at 1.1 million contracts.
  • 25,000 5 Year contracts and 19,500 20 Year contracts were rolled.
  • 101,578 3 Year and 41, 181 10 Year contracts were taken to cash settlement.
  • 3,332 5 Year and 440 20 Year contracts were taken to cash settlement.
  • 121,704 AU 90 Day Bank Bill Futures were taken to cash settlement.
  • 23,919 NZ 90 Day Bank Bill Futures were taken to cash settlement. 

OTC swap volumes

Global AUD OTC swap volumes maintained their increased levels in Q2 2022 vs Q1 2022 as a result of continued increases in shorter-dated interest rate swap and OIS volumes.  ASX’s OTC Clearing service has recorded total notional cleared of A$1.46Trn in Q2 2022, up 136% 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 2.02 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 implements global standard OTC fallback rate provisions and OTC product enhancements: On 27 June 2022, ASX implemented changes to the ASX Clear (Futures) OTC Rules and Handbook; and its OTC Clearing Platform to:

  • implement globally standardised benchmark fallback rate provisions in relation to the OTC interest rate derivatives products cleared by ASX.
  • introduce OTC product enhancements to support the Actual/Actual ICMA Day Count Convention for the clearing of Assets Swaps and the IMM AUD roll convention, the industry convention to enable swaps to roll on ASX’s bank bill futures dates.
  • A copy of the formal market notice published by ASX is available here.

$1.46 Trillion

Total notional cleared in Q2 2022, up 136% vs pcp.                 

2.02 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.

Benchmarks

The key theme of the second quarter of 2022 was the continued aggressive steepening of the BBSW yield curve due to inflationary pressures and consequent interest rate hikes. Yields on 6-month NCDs are now trading above 270 basis points with the BBSW yield curve now at pre-pandemic levels.

To provide an indication of the steepness of the yield curve, the spread between the 1-month and 3-month tenors at one stage during the quarter was at its widest levels ever recorded. This was the same for the spread between for the 3-month and 6-month tenors.

During Q2 2022, daily eligible volume for the purposes of calculating BBSW using the transaction based layer averaged $2.03 billion per day ($1.84 billion in Q1 2022). This elevation in average daily eligible volume translated to an average of 3.15 tenors per day being formed using the transaction layer (2.4 tenors in Q1 2022).

MARKET UPDATES

 

RBA - Yield Target Review

The RBA recently published a review of the Yield Target (YT) program implemented in March 2020 and discontinued in November 2021. The review found that there were two periods of strained market conditions in February to March 2021 and late October to November 2021.  During these periods:

  • There was a divergence in yield between 3 year futures and 3 year physical bonds which was not rectified by arbitrage activity. The same divergence did not occur for the 10 Year future.
  • The RBA’s substantial holdings of Yield Target bonds, along with the fee charged to those wanting to borrow Yield Target bonds, resulted in reduced liquidity in those lines.
  • By holding 3 year basket bonds at 10bps, the 3 year futures price was also pinned to some extent, moving only half as much as it would normally in response to changes in the yield curve. This made hedging non Yield Target bonds with 3 year futures more difficult.

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AOFM – update from Rob Nicholl, CEO

At a recent event with the Australian Business Economists, Rob Nicholl provided an outlook for AOFM issuance.  He discussed the cash portfolio management task and how this continues to impact issuance behaviour, thoughts on the year ahead and AOFM’s observations on market risk and its relevance to AOFM. 

Learn more