Futures Firm, Domestic Reaction Eyed

Focus will fall on the degree of continued fallout from the latest BoJ decision.

• JGB futures added 44 ticks in post-Tokyo trade, after initially leaning on the bid in U.S. Tsys, although the bid in JGB futures was a little more sticky than that witnessed in some of the Tsy benchmarks.
• A reminder that onshore participants seemed keen to set up a test of the BoJ’s will on Wednesday, with 10-Year JGB yields closing 2bp below the BoJ’s freshly installed YCC cap, after peaking at 0.487%.
• We will be on the lookout for off-schedule BoJ Rinban and fixed rate operations if the test becomes even more pronounced.
• The 10-Year kink remains evident on the curve, which creates a natural challenge for the BoJ as it tries to implement its YCC settings.
• Note that Nippon Life have indicated the potential to allocate even more capital to JGBs, with the company’s senior general manager of investment planning telling BBG that “it makes no economic sense to buy Treasuries when currency hedging costs exceed their yield”…”We expect the yen to strengthen toward next year. It will be difficult for us to buy foreign bonds without currency hedging until we can see a better level.” We have flagged such reasoning in detail in recent weeks/months.
• Weekly international security flow prints and lower tier data headline locally on Thursday, with the outdated minutes from the BoJ’s Oct meeting also slated.