Curve Flattens, Futures Coil

JGB futures have been happy to consolidate during the Tokyo afternoon after failing to build on a short and limited look above their overnight high during the Tokyo morning, last dealing +9 vs. yesterday’s settlement level, a little shy of best levels. The major cash JGB benchmarks run 0.5-3.0bp richer across the curve, bull flattening. There hasn’t been much in the way of decisive news flow to digest leaving participants to react to yesterday’s flattening of the U.S. Tsy curve and limited cross-market gyrations observed since the open.

• BBG conducted an interview with “Mr. JGB,” who warned that “investors should start preparing for a return to normal Japanese bond trading as the central bank will one day step back from its debt purchases.” This hasn’t had much in the way of market impact, although the article has generated plenty of interest.
• 10-Year breakevens have moved to the narrowest levels observed since early April. Today’s 10-Year JGBi auction results were mixed. The price component was comfortably firmer than expected, although the cover ratio softened to 3.323x, below the 6-auction average of 3.48x. The pricing suggests there was decent enough demand for inflation protection given the current well-documented global inflationary picture, with some participants willing to pay up for such protection, although the limited nature of the spill over into Japanese prices likely tempered wider demand, limiting the cover ratio. It would seem the market has looked to the softer cover ratio when it comes to subsequent price action.
• Elsewhere, the latest round of Japanese weekly international security flow data suggested that the sizable covering of short JGB positions on the part of international investors resumed last week, after a one-week break, with their net purchases of Japanese bonds comfortably topping the Y1tn mark for the third time in four weeks.
• Wage and household spending data headlines the domestic docket on Friday.