Cheapening Observed After Upper House Elections

JGB futures moved lower during the Tokyo morning, with domestic equities pushing higher in the wake of Japan’s ruling coalition deepening its grip on power in the weekend’s upper house elections, which will allow PM Kishida to continue to push forward his idea of modern capitalism, while participants also continue to speculate on the future shape of Japanese defence and monetary policy. This mix of domestic political matters, coupled with wider weakness in global core fixed income markets in the wake of Friday’s U.S. NFP print, has allowed the space to cheapen. Futures hit the lunch bell -38, just above worst levels of the session, while cash JGBs were little changed to 3.5bp cheaper across the curve, bear steepening (although 7s were softer than directly surrounding lines on the weakness in futures). Note that 10-Year JGB yields are being limited by the upper boundary of the BoJ’s permitted -/+0.25% trading band at present. Swaps out to 10s were generally wider on the day (excluding 7s given the futures-related weakness), while 20+-Year swap spreads were narrower on the day. There hasn’t been much in the way of meaningful macro, nor domestic news flow to digest since the Tokyo re-open.