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10Y ACGB Not Modeled By Australian Economic Fundamentals: DB

For modelling 10Y ACGB yield, usage of market rates such as the 10Y UST yield and relative front-end pricing would be preferred rather than a model based on Australian domestic economic fundamentals, believe analysts at Deutsche Bank AG (NYSE:DB) (ETR:DBK) (FRA:DB). David Plank suggests in his July 29 report titled “Australia: Modeling the 10Y ACGB” that the China/U.S. growth gap would be more a reasonable forward indicator for relative AUD/USD front-end pricing.

Some approaches to model 10Y ACGB

Plank points out that though domestic fundamentals could be an obvious starting point to model for the 10Y ACGB, simply looking at nominal GDP growth doesn’t appear to provide much information about its likely level. The analyst argues that a model which combines a number of variables such as real GDP, CPI, the AUD and the RBA cash rate seems to do a pretty good job. By using quarterly data back to 1990, the analyst get an R-squared level of 0.9:

However, the analyst concedes that there are econometric problems with such a reduced form equation, such as model...


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