BoJ Action Promotes Bid In Core FI

BoJ matters were at the fore overnight, with the central bank-driven bid supporting wider core fixed income.

• That allowed TYM2 to break above Tuesday’s peak, last dealing +0-10 at 122-20+, with volume topping 190K on the session. Cash Tsys run 3-5bp richer on the days, with 5s leading the bid. There wasn’t much else in the way of meaningful headline flow, with Atlanta Fed President Bostic (’24 voter) reaffirming his views re: rate hikes (flexibility required), while pointing to uncertainty promoting some relative demand for the longer end of the Tsy curve resulting in the current flattening dynamic. Markets looked through the latest city lockdown in China (implemented in the tavel hub of Xuzhou, population ~9mn). Flow was headlined by 2 block sales of FVK2 114.00 puts (10K in total) and a block buy of FVM2 futures (+1,945), which may have been related to the options flow. Wednesday’s NY session will bring the release of ADP employment data (ahead of Friday’s payrolls print) & Fedspeak from Richmond Fed President Barkin (’24 voter) & Kansas City Fed President George (’22 voter)
• The U.S./Japan 10-Year yield differential has edged further away from the recent wides, with U.S. 10-Year Tsys managing to outperform their JGB counterparts, even as the BoJ adjusted its Rinban operations to counter recent curve-wide moves higher in yields, with upsized and unscheduled Rinban operations evident this morning, before an unconventional, unscheduled second round of Rinban operations was tendered during the Tokyo afternoon (the wider than expected focus of today’s BoJ’s purchases means that the super-long end of the JGB curve has benefitted more than 10s). JGB futures surged as a result, but have pulled back from best levels, last +60 (25 ticks off their peak). Cash JGB trade has seen bull flattening, with 30s richening by 9bp, while 7s have outperformed nearby paper given the bid in futures. JGB-OIS spreads widened as the BoJ reaffirmed its dovish credentials.
• Aussie bonds traded as a wider function of core FI markets, with no immediate reaction to firm pricing in an auction of the illiquid ACGB Apr-24 (with the same illiquidity likely resulting in extremely strong pricing, even as the cover ratio printed below 2.50x), while the AOFM’s initial FY22/23 issuance outline wasn’t as high as expected (once again, this failed to inspire price action, as the lower issuance task likely points to completed pre-funding of an upcoming ACGB maturity). YM +13.0 & XM +9.0 into the bell.