Aggressive Flattening

JGB futures haven’t been able to force a meaningful break above their overnight session high, despite a brief look above the level during the Tokyo morning.

• A fade away from best levels then occurred alongside a pullback in wider core global FI markets, with a poorly received round of 10-Year JGB supply also factoring into that dynamic.
• In terms of auction specifics, the low price saw the cover ratio tumble to levels comfortably below the recent averages, while the low price missed wider dealer expectations. The lacklustre result comes after the BoJ’s recent defence of its YCC parameters and firm insistence on holding its current policy settings as they are. The previously-flagged lack of relative value, coupled with the potential for participants being cognisant of the degree of richening away from the 0.25% yield ceiling that the BoJ permits, likely resulted in soft demand.
• Still, continued worry surrounding the impending journey of U.S. House Speaker Pelosi to Taiwan underpinned the space post-acution, facilitating a recovery in futures (the pullback was relatively shallow), with the contract last dealing +19, a little off best levels. Wider cash JGB trade has seen bull flattening of the curve, with the major benchmarks running little changed to ~6.5bp richer. 10s have underperformed surrounding tenors all day on the back of set up for and in reaction to the previously outlined supply. The bid in the super-long end has accelerated ahead of the close.
• The latest round of BoJ Rinban operations headline the domestic docket on Wednesday.