Curve Twist Flattens

Wednesday saw another day of firm demand for super-long JGBs, although the 1- to 10-Year zone cheapened in the afternoon, with little in the way of a definitive catalyst observed. Note that the aforementioned bid in the longer end seems to be driven by interest in JGBs, with super-long swap spreads a little wider on the session, albeit back from session wides ahead of the bell.

• That leaves the major cash JGB benchmarks running little 2.0bp cheaper to 2.5bp richer as the curve bull flattens.
• Futures pulled lower in the Tokyo afternoon after paring modest overnight losses in the morning, last dealing -26.
• The breakdown of the latest BoJ Rinban operations revealed the following offer/cover ratios:
• 1- to 3-Year: 1.80x (prev. 2.66x)
• 3- to 5-Year: 3.13x (prev. 3.22x)
• 5- to 10-Year: 2.97x (prev. 2.04x)
• We wouldn’t suggest that the uptick in the offer/cover for the 5- to 10-Year bucket was meaningful enough to drive the sell off observed in JGBs out to 10s during the Tokyo afternoon, at least not in isolation.
• A reminder that Japan will observe a national holiday on Thursday, which will mean that JGBs are closed. Any downside momentum in futures/JGBs out to 10s in the wake of the uptick in the offer to cover in the 5- to 10-Year Rinban operations may have been exacerbated by traders closing out longs as they don’t want to carry excess risk over the period when U.S. CPI data will be released, given the holiday closure of JGB markets.
• A slightly firmer than expected PPI print has headlined when it comes to domestic news flow, although there was still a moderation in the rate observed in the headline Y/Y reading (to +8.6% from +9.4%).
• Elsewhere, Japanese Finance Minister Suzuki noted that protecting the fiscal health of the nation is his most important task, while highlighting the severe fiscal issues facing the country.