Futures Off Lows Aided By Super-Long End Bounce, Curve Still Steeper

A two-way afternoon for JGB futures saw the contract show further below it overnight low before benefitting from a bid in the super-long end, leaving it -16 as we move towards the close, 20 ticks off worst levels.

• Cash JGBs now run 0.5bp richer to 1.0bp cheaper, twist steepening, with a pivot around 3s as 20s providing the weakest point on the curve.
• The long end unwound most of the steepening/weakness observed in the morning (30s cheapened by over 4bp at one point) on the back of a liquidity enhancement auction for off-the-run 15.5- to 39-Year JGBs, with this week’s concession seemingly doing enough to result in the smooth passage of supply.
• Note that the cover ratio still printed below 2.50x, while the spreads observed remained wide by a historical standard, but the previous auction came in June, which generated a particularly wide tail and low cover ratio as the markets challenged the BoJ’s YCC settings, so skewed optics may have aided the long end rally.
• Comments from BoJ’s Nakamura failed to move the needle, as he stuck with the central bank’s core view.
• Looking ahead, Tokyo CPI data headlines Friday’s dockets, but shouldn’t impact the BoJ given its insistence that it will not act on the current cost-push inflation dynamic, amid its hunt for more notable wage growth.