Curve Steepens Further, Fresh Payside In Swaps, BoJ Tested

JGB futures pull aggressively lower, forcing a move through their September lows, before ticking away from worst levels of the session to last trade -25 on the day. Bears will now look to the June cycle lows as the next meaningful point of technical support, although a move to those levels would require a somewhat serious challenge of the BoJ’s YCC settings ahead of next week’s monetary policy decision.

• The move comes as U.S. Tsys across the curve registered fresh cyclical highs in yield terms and after this morning’s upsized, and in one case unscheduled, BoJ Rinban operations did little to placate markets.
• The major cash JGB benchmarks run 2-7bp cheaper across the curve, with the super-long end trading weaker all day as participants look to test the BoJ. 20- to 40-Year yields have all registered fresh cycle highs in recent trade.
• The move has been accompanied by fresh payside flow in 10-Year swaps, with the 10-Year swap spread pushing further above its mid-June peak, as participants use this channel as another method of testing the BoJ’s will (the BoJ controls 10-Year yields, not swaps).
• Note that the pull lower in JGBs came as USD/JPY pushed through yesterday’s high, with the pair registering a fresh cycle peak in the process.