Curve Twist Flattens As Pre-BoJ Caution Becomes Evident

JGB futures continued to leak lower in the afternoon, initially exhibiting similar moves to U.S. Tsys. The contract showed higher before dealing on the backfoot as Thursday wore on.

• Weaker than expected final Q4 GDP data also factored into the early bid that was seen across the curve, allowing futures to spike through their overnight high, before a turnaround took place.
• The presence of liquidity enhancement supply covering 1- to 5-Year off-the-run JGBs and the lukewarm cover ratio observed at the auction meant that the front end of the curve struggled.
• Still, the long end was more resolute, which may indicate that some were willing to reset hawkish twist flattener plays ahead of tomorrow’s BoJ meeting (after a seeming position clear out of such plays in recent sessions). We would also suggest that some pre-BoJ caution applied pressure to futures into the close, even though a clear majority expect no change in policy settings (that doesn’t prevent some hedging, particularly given the varying degrees in conviction re: that view).
• 7s provided the weakest point on the curve as a result of the weakness in futures, cheapening by 3bp, while 30+-Year paper finished ~1bp richer as the curve twist flattened.
• Domestic headline flow was generally limited outside of the GDP release.
• The aforementioned BoJ decision headlines the domestic docket on Friday (see our full preview of that event here). PPI and household spending data will also cross ahead of the weekend.