Poor Digestion of 20-year Supply

20-year supply sees poor digestion as the low-price printed below dealer expectations (which stood at 99.30, per the BBG poll) and the cover ratio at 2.973x declined sharply versus 3.942x at last month’s auction. However, it is worth noting that last month’s cover ratio was the highest observed at a 20-year auction since mid-2020.

• As highlighted in the auction preview, expectations for a positive outcome today, similar to the previous month's auction, were likely to prove misplaced given recent longer-dated JGB auctions had indicated that local investors may be inclined to seek higher yields or take a more cautious approach in assessing the BOJ's policy outlook before significantly increasing their holdings of longer-dated JGBs.
• Even with the 10/20 yield curve at its steepest since March and the 20-year JGB trading at a more attractive level relative to the 10/20/30-year butterfly than in mid-September, these factors did not significantly boost demand in today's auction.
• JGB futures have initially gapped lower after the lunch break, reaching a new Tokyo session low of 145.14. At 145.20, JBZ3 is -26 compared to settlement levels.
• The 20-year JGB initially cheapened 1bp in post-auction trade.