Futures Lead Weakness After Tokyo Holiday, Swap Spread Widening Adds Further Pressure

The early Tokyo cheapening impetus held through Wednesday’s session after Japanese participants returned from Tuesday’s holiday and reacted to a moderation in systemic fears surrounding the global banking sphere.

• That leaves JGB futures the best part of 80 ticks lower into the close, with bears unable to force a test of early session lows despite various rounds of selling pressure becoming evident as the session wore on.
• Cash JGBs sit 1-8bp cheaper with 7s leading the weakness given the move in futures.
• Meanwhile, swap rates are 3-10bp higher as that curve steepens, with swap spreads wider across the term structure, meaning that payside swap flows exerted some pressure on JGBs at different stages of the day.
• Some light richening in U.S. Tsys and the proximity to the impending FOMC decision probably provided some light counter to the broader weakness in JGBS.
• Local news flow was dominated by the loose outlining of a Y2tn fiscal package (drawn up from reserve funds) that will aim to lessen the inflationary burden in Japan (handouts for low-income households and support for those using LNG as an energy source). This comes ahead of next month’s local elections.
• Looking ahead, global matters are set to continue to dominate on Thursday, with a liquidity enhancement auction for off-the-run 5- to 15.5-Year JGBs the only point of note on tomorrow’s local docket.