BoJ Active, Tsys Soften

U. S. Tsys cheapened a touch in overnight trade, although it wasn’t one-way traffic, with spill over from the recovery off Monday’s session lows eventually negated by payside interest in swaps & some spill over from the JGB space (post-supply). That leaves the major cash Tsy benchmarks 2-5bp cheaper into London dealing, as the curve bear flattens. TYM2 is -0-05 at 121-17+, just off worst levels of the session. A block roll of FV 114.25 puts down into the 113.25 strike (10K in size) and a 5K block sale of the 114.25 puts in isolation (profit taking) headlined on the flow side in Asia. Tuesday’s NY docket includes consumer confidence & JOLTS job openings data, Fedspeak from NY Fed President Williams & Philly Fed President Harker (’23 voter) & 7-Year Tsy supply. The ongoing Russia-Ukraine summit in Turkey will also garner interest.

• JGBs pulled back from their overnight session lows, initially aided by the presence of the BoJ’s fixed rate operations to enforce the upper end of its permitted 10-Year JGB yield trading band (Scheduled through the end of March). Still, the curve ran steeper as concession was built in ahead of today’s 40-Year auction. The auction itself was particularly soft, with the high yield coming in 5.5bp above wider expectations, proxied by the BBG dealer poll. We also saw the cover ratio crater to the lowest level observed at a 40-Year auction since ’11. We would suggest that the ongoing market vol. and the lack of relative control exerted by the BoJ in this area of the curve deterred prospective bidders, while others were not willing to aggressively bid for access to the line owing to the same factors. The curve has steepened further post-auction, given the soft demand, with 40s now ~10bp cheaper on the day, while futures have softened to last trade -17 (well within the confines of the range observed since yesterday’s Tokyo close). 10-Year JGB yields continue to operate just above 0.250%, with the combination of a soft 40-Year auction and no pullback in 10-Year JGB yields seemingly dragging the BoJ back in to conduct a second round of fixed rate operations to enforce the upper end of its permitted 10-Year JGB yield trading band.
• There wasn’t much in the way of idiosyncrasies to go off when it came to the ACGB space. This evening’s budget has been subjected to the usual round of press leaks and pre-announcements, with more market focus set to fall on AOFM issuance matters surrounding the headline event (which will likely be released on Wednesday). YM -7.0 & XM +1.0 at typing. Longer dated cash ACGBs sit ~2.0bp richer on the day.