Bear-Steepening Ahead Of 20Y Supply Results

At the Tokyo lunch break, JGB futures are cheaper and at session lows, -20 compared to settlement levels.

• Core machinery orders, excluding those for power generation equipment and ships, dropped 4.9% m/m in November, posting the first monthly decrease in three months.
• Weekly investment flows were strong across the board in the week ending Jan 12. Offshore investors bought ¥980bn of local bonds. Bond flows remain a net negative though since the start of Dec last year. In terms of Japan’s offshore buying, we saw a sharp rise in bond purchases. Since the start of the year, we have seen over ¥2000bn in net outflows to this space by local investors.
• The cash JGB curve has bear-steepened, with yields 1-4bps higher. The benchmark 10-year yield is 1.1bp higher at 0.628% versus the Nov-Dec rally low of 0.555%.
• The 20-year yield is 3.6bps higher at 1.35% ahead of today’s supply. The current auction presents an outright yield of around 10bps lower than the level observed in December and approximately 40bps lower than the cycle high set in late October.
• While a decrease in demand might be expected in isolation, it is essential to consider the improved sentiment towards longer-dated bonds globally since early November. Today’s auction does however come on the heels of suboptimal results at January’s 5-, 10- and 30-year JGB supply.
• The swaps curve has also bear-steepened, with swap spreads mixed.