JGBs Firm, Aided By Solid Auction

JGB futures held onto their overnight gains during the Tokyo morning, building on the uptick during the afternoon to last trade +10 vs. yesterday's settlement. The major benchmarks across the cash JGB space have richened by 0.5-2.0bp, with the long end lagging, prompting some light bull steepening, with that dynamic perhaps aided by the proximity to this afternoon's 10-Year JGB auction (10s caught up to the rally in the wake of the auction).

• The allure of new paper & the attractive carry and rolldown proposition vs. the belly of the curve likely supported takedown at the auction, with the price tail narrowing back to a compact length after last month's widening, while the cover ratio ticked back from the multi-year low witnessed at June's 10-Year JGB auction. The low price topped broader expectations, proxied by the BBG dealer poll. Still, in the grand scheme of things it wasn't the strongest auction we have seen and was working against a low base, with some valuation (both outright and relative) matters likely constraining demand.
• The Q2 BoJ Tankan survey disappointed across the board, excluding a larger than expected uptick in the CapEx plans amongst large firms. The remainder of the metrics covering large firms represented firmer prints vs. Q1, although disappointed vs. consensus, while the major metrics covering small firms weren't quite as negative as the corresponding Q1 readings, but still disappointed vs. broader exp. Firms continue to see very moderate inflationary pressures over a 5 year horizon. Recent headlines covering comments from Japanese chief cabinet secretary Kato noted that the ruling LDP party is not considering drawing up a supplementary budget/extra economic measures at present.
• The latest round of BoJ Rinban operations (covering 1- to 5- and 10- to 25-Year JGBs) headline the local docket on Friday.