Off Best Levels Even As 10-Year Auction Cover Ratio Surges

Spill over from Monday’s NY session and the previously outlined swings in wider risk appetite during Tuesday’s Asia-Pac session drove JGB trade on Tuesday.

• JGB futures are comfortably off of best levels as a result, last dealing +8 on the day.
• Cash JGBs run little changed to 1.5bp richer across the curve, with 7s and 20s providing the firmest points on the curve. Outperformance in 7s was likely linked to the overnight and early Tokyo bid in futures. Note that 10s have underperformed all day, which would have been linked to pre-auction concession ahead of today’s 10-Year JGB supply.
• In terms of specifics, the latest 10-Year JGB auction saw softer than expected pricing, with the low price missing wider expectations, coming in at 99.53 (the BBG dealer poll looked for a low price of 99.56). Still, the cover ratio jumped to the highest level observed at a 10-Year JGB auction since the first half of the ‘00s, while the price tail experienced some incremental narrowing. It would seem that short cover and the BoJ’s reinforcement of its existing YCC settings outweighed any worry surrounding relative value appeal, with yields operating around 0.5bp shy of the upper limit of the BoJ’s permitted 10-Year JGB yield trading band. Still, as mentioned, wider price action in core FI markets dictated price action in JGBs, facilitating some very modest cheapening during the Tokyo afternoon.
• Local headline flow was dominated by comments from BoJ senior official Uchida, as he pushed back against any speculation that the BoJ could widen/alter its permitted 10-Year JGB yield trading band, likening such a move to a rate hike, while stressing that Japan doesn’t need to tighten monetary policy.
• Domestic household spending data was a touch firmer than expected but still in negative territory (-2.3 Y/Y vs. BBG median -3.3%).
• Tomorrow’s local docket looks particularly thin.