Curve Flattens, Futures Finish Off Best Levels

JGB futures finished away from best levels of the session, after an early Tokyo rally failed to breach the overnight session high, although the contract was comfortably firmer on the day, +138 at the close.

• JGBs in the intermediate zone of the curve pulled away from best levels after 10-Year swap rates found an intraday base just above the BoJ’s YCC cap (where a low of 0.516% was registered this morning). This probably isn’t a coincidence, as 10-Year swaps are viewed as a fair value play re: JGBs given the relative lack of BoJ control over that market.
• This combination saw 10-Year JGB yields pull away from multi-month lows, after showing below the BoJ’s prior YCC cap (0.25%) for a large chunk of the session. A reduction in short positioning seems to be a clear factor in the recent round of richening in the 7- to 10-Year sector, but does leave the space susceptible to pressure if fresh BoJ YCC speculation is triggered by a hawkish repricing of the path of global central banks.
• Cash JGBs sit 1-16bp richer across the curve, with bull flattening in play after the early outperformance of 7s and 10s gave way. Swaps spreads are tighter out to 5s, but mixed beyond that.
• Local headline flow was limited.
• 5-Year JGB supply saw tepid reception, with outright richness countering relative and carry & roll appeal.
• BoJ Rinban operations headline domestically tomorrow.