BofA Mark ’22 10-Year JGB Yield Fcast Higher, Recommend Long 10s Vs. Swaps

{JN} JGBS: Bank Of America Mark ’22 10-Year JGB Yield Forecast Higher, Recommend Long 10s Vs. Swaps

Bank of America note that “rising geopolitical risks have driven up the oil price, weakened the JPY via a wider U.S.-Japan yield spread, and exerted upward pressure on JGB yields. Our simulation of fair value for 10-Year JGB yields under several scenarios suggests risks are skewed to higher yields.”

• “We believe the weaker JPY and rising oil prices will drive up nominal yields via an increase in inflation expectations.”
• “Based on our simulation of fair value for the 10-Year JGB yield and the potential for the BoJ to raise the YCC band from +/-0.25% to 0.0-0.5% in October, we expect the 10-Year yield to rise to around 0.4% at end-2022. We expect the JGB yield curve to continue steepening. While we expect the U.S. Treasury curve to bear-flatten, at this point we do not expect the BoJ to begin quantitative tightening (QT), and we believe its JGB purchases will continue to cap the uptrend in yields for 10-Year and shorter maturities. The relative lack of BoJ support for superlong JGBs suggests a structural tendency for the JGB yield curve to steepen.”
• “Based on the above, we recommend being long 10-Year JGBs (vs. matched maturity TONA Swap). Amid upward pressure on overall JGB yields, we see the potential for swap rates to rise more rapidly than yields given that they are not subject to YCC. Meanwhile, should global yields fall on heightened geopolitical or economic risk, JGB yields should fall and outperform swap. Our recommendation has an entry of 5.0bp, target of 15.0bp, and stop loss of 0.0bp. Risks include receding expectations for policy normalization caused by a decline in commodity prices and end to import price inflation.”