Futures Consolidate Overnight Losses, Long End Bid

JGB futures have dealt either side of late overnight session levels during Tokyo trade, -20 into the bell, as they pull away from session lows after correcting from post-BoJ highs lodged late Monday. Cash JGBs are 1.5bp cheaper (10s are the only benchmark that have cheapened) to 3bp richer, with demand observed in the long end (perhaps as lifers begin to redeploy capital after the post-BoJ steepening).

• The swap curve has twist flattened, with benchmark rates running 2bp higher to 3bp lower, with a pivot observed around 20s.
• BBG’s measure of basis between the pricing of JGB futures and their underlying bonds has moderated from the pre-BoJ spike higher. Still, the basis measure identified remains elevated in a historical sense as the BoJ continues to face market functioning issues (see more on that matter here https://marketnews.com/futures-basis-back-from-levels-seen-pre-boj-run-higher-but-still-evident)
• Note that the BoJ’s trimmed mean measure of underlying inflation rose 3.1% Y/Y in December, representing a fresh record high, as pass-through of cost increases continued.
• There was incremental slippage when it comes to the average and high spreads that prevailed at the latest liquidity enhancement auction covering off-the-run 1- to 5-Year JGBs, with the cover ratio also ticking lower. However, these metrics still depict smooth takedown of today’s supply.
• BoJ Rinban operations headline tomorrow.