Curve Steepens, BoJ Steps In To Defend YCC

JGB futures sit -28 as we work towards the Tokyo close, after the contract shifted lower at the open, in sympathy with the moves witnessed in wider core global FI markets on Monday, before stabilsiing.

• Bears now target the 20 Jun low (140.07) in the contract as the next meaningful point of support.
• Cash JGB trade has seen bearish steepening on the curve, with the major benchmarks running 1.0-8.5bp cheaper, with the long end suffering from the lack of relative BoJ control.
• Note that the BoJ stepped in to defend its YCC mechanism, with the latest round of off-schedule Rinban purchases covering 5- to 25-Year JGBs.
• At least some of the weakness in the longer end of the curve was owing to setup ahead of today’s 40-Year JGB auction. The high yield witnessed at the auction matched wider expectations, while the cover ratio fell back towards the lows seen at March’s 40-Year auction. It would seem that ongoing market volatility and fear surrounding a potential continued sell off dominated any outright or relative value propositions, limiting demand.
• Tomorrow’s local docket is limited, with the outdated minutes from the BoJ’s July meeting and lower tier domestic data due.