Futures Stronger After 20-Year JGB Auction Shows Solid Demand

JGB futures are stronger in Tokyo afternoon trade, +27 versus settlement levels, reversing overnight weakness despite much stronger than expected Q1 GDP data.

• 20-year supply sees smooth digestion as the cover ratio shifts to the highest level in a year. Japanese investors, particularly domestic life insurers and pension funds, appear to be showing a trend of allocating capital to the super-long end of the JGB curve in response to elevated FX-hedging costs in the new fiscal year. The strong demand observed at the recent 30-year auction further supports this observation.
• At 149.12, JBM3 sits close to its highest level for May. Nonetheless, it remains positioned within a range of 147.92 (the upper limit of April's trading range) and 149.53 (the high point of March 22).
• Cash JGBs, beyond the 1-year zone, increase their richening in afternoon trading with yields 1.0-4.7bp lower and the yield curve flatter. The benchmark 10-year yield is 3.0bp lower at 0.367%. The 20-year yield is 4.0bp lower post-auction, sitting -4.7bp on the day at 0.966%.
• Swap rates are lower with the curve flatter and swap spreads generally wider for except the 4-7-year zone.
• The local calendar sees the release of April Trade and weekly International Security Flow data ahead of April National CPI data on Friday.
• Tomorrow also sees BoJ Rinban operations covering 1-10-year and 25-Year+ JGBs along with an auction of Y3.5tn 12-month bills.