Goldman: Openness To YCC Adjustments + Global Selloff = Steeper JGB Curves

Goldman Sachs note that “although there is some speculation that Kuroda could make some adjustments to YCC to ease his successor Ueda’s task, our baseline is that there will be no action at this week’s meeting.”

• They still look for the BoJ to shorten it’s YCC focus area to 5s at some point in Q223.
• “We suspect markets will continue to test the 10-Year YCC band episodically, particularly into BoJ meetings once the new leadership is in place.”
• “In terms of yield curve pricing, we believe it should translate to steeper long end curves, particularly beyond the 5-Year point. The flattening seen over the past month, therefore, offers an attractive entry level to set steepeners -- the 5s30s JGB curve is close to the flattest levels since last fall.”
• “What is surprising is this flattening has occurred despite a sharp selloff in global bond yields.”
• “We believe some of the recent strength seen in longer maturity JGBs comes from idiosyncratic and seasonal factors. In addition to fiscal year-end buying by lifers, February featured a large month-end extension. Pension buying was also likely a factor, given that market moves since December.”
• “While some of the seasonal factors could be a continued source of support this month, they will ultimately prove temporary, we recommend adding 5s30s JGB curve steepeners.”
• They recommend entering the position at 119bp, with a target of 140bp and a stop of 110bp.