Long End Weakness Promotes Twist Steepening Post-Powell & Pre-BoJ

JGB futures have moved further away from their early Tokyo lows during afternoon trade, printing -3 ahead of the bell.

• The early steepening dynamic and leg lower in JGB futures was seemingly a product of follow through from Fed Chair Powell’s hawkish warnings. Super-long paper remained heavy throughout the day with U.S. Tsys operating on the backfoot in Asia.
• The twist steepening dynamic in JGBs thereafter was potentially a product of continued unwinds of hawkish flattener plays pre-BoJ and a subdued to average round of cover ratios in the latest round of BoJ Rinban operations (1- to 25-Year JGBs). Cash JGBs are 0.5bp richer to 3bp cheaper into the close, with only 30s and 40s sitting cheaper on the session.
• Local headline flow was subdued.
• There isn’t much to inspire on the local calendar on Thursday, with final Q4 GDP readings providing the pick of the bunch. We will also get the latest liquidity enhancement auction covering off-the-run 1- to 5-Year JGBs.
• Focus remains squarely on Friday’s BoJ decision. A clear consensus looks for no change in BoJ policy settings come the end of outgoing Governor Kuroda’s final policy meeting. However, the Bank’s recent propensity to shock (see the surprise widening of the YCC band back in December) means that this view is held with varying degrees of conviction. There will be more on that matter in our full preview of the event.