JGBs Find An Intraday Base After 10-Year Swap Bounced Just Above YCC Cap

10-Year JGB yields are showing back above 0.20% after printing a multi-month low just below 0.18%,

• While the magnitude of the move below the BoJ’s current YCC cap (0.50%) was triggered by a clear out of short positioning as global central bank repricing took hold post-SVB, we have noted that expectations for a further YCC tweak remain in place (consensus looks for a move in Q223).
• This will leave the 7- to 10-Year zone of the JGB curve susceptible to fresh pressure if there is fresh hawkish impetus re: market pricing of global central bank rate paths, particularly given that 10-Year JGB yields now sit below the upper boundary of the BoJ’s prior YCC band (0.25%), which was brutally broken by markets in ’22.
• We also note that that 10-Year JGB yields bottomed out around the time that 10-Year swap rates found a base just above the upper boundary of the BoJ’s current YCC framework (printing a low of 0.516% today). We don’t think this is a coincidence, with the market viewing the 10-Year swap rate as a bit of a fair value play re: JGBs, given the relative lack of BoJ control on that market. For reference, 10-Year swap spreads (a view on market pressure re: YCC settings) operate around the middle of the range witnessed since the Bank’s January meeting, comfortably shy of the cycle peak.