Futures Cheaper But Off Worst Levels At Lunch

At the Tokyo lunch break, JGB futures have moved away from the morning low to -17 compared to the settlement levels.

• The local calendar is light today, with Leading and Coincident Indices for August (final) due later.
• Today’s morning weakness was therefore unexpected given it flew in the face of lower US tsy yields during Tuesday’s NY session. Moreover, cash US tsys are dealing flat to 2bps richer across the major benchmarks so far in Asia-Pac trade, with a light steepening apparent. TYZ3 deals at 106-15+, +0-04 compared to NY closing levels.
• One possible explanation for today’s move comes from Cranfield at Bloomberg. He believes the fact that JGBs are still biased lower despite an unscheduled buying operation and support for the belly of the curve via 5-year loans could be adding to bets for abandoning yield curve control at next week’s policy meeting. (See link)
• Cash JGBs are cheaper across benchmarks, with yields flat (3-year) to 2.0bps higher (20-year). The benchmark 10-year yield is 1.0bps higher at 0.861%, above BOJ's YCC soft limit of 0.50% but below its hard limit of 1.0%. It is also lower than the cycle high of 0.882% set on Monday.
• The swap curve has twist-steepened, pivoting at the 7s, with rates 1bp lower to 1bp higher. Swap spreads are generally tighter across maturities.