Futures Extend Overnight Weakness in Tokyo Trade, 10Y Above YCC 0.50% Threshold

In early Tokyo trade, JGB futures have extended overnight weakness, -102 compared to settlement levels. Importantly, the 10-year yield rises above BoJ’s YCC threshold of 0.50%, testing the bank’s resolve.

• While we expect Governor Ueda to exhibit patience, in line with consensus, the risk that the Bank might tweak YCC at today’s meeting has increased following Nikkei’s overnight report. Certainly, there are market commentators advocating for policy action this month, driven by the evolving inflation dynamics in Japan.
• It's important to consider that BoJ officials have acknowledged their reluctance to signal the timing of any policy changes in advance. Hence, if the BoJ were to surprise the market, we believe it could take one of two possible actions: either widen the trading band around the 10-year target of 0% or shorten the tenor of the YCC target to 2-5-year JGBs.
• JGBs appear to have been pressured by Tokyo CPI data that tops consensus forecasts. (See link)
• Cash JGBs are 1.3bp to 7.6bp cheaper with the futures-linked 7-year zone leading. The benchmark 10-year yield is 5.7bp higher at 0.507%, above BoJ's YCC limit of 0.50%.
• The swap curve has bear steepened with rates 1.5bp to 8.6bp higher. Swap spreads are wider apart from the 7-year.