Post-Auction Long End Bid Results In Flattening

Lower crude prices and Wednesday’s rally in core global FI markets provided a bid for JGBs during early Tokyo hours.

• The latest round of 20-Year JGB supply saw the low price print a little below wider expectations, while the cover ratio softened to sit roughly in line with the 6-auction average, as the price tail widened. Note that factors centred on the well-documented impaired JGB market functioning made a strong auction very unlikely, although short cover and potential lifer demand likely provided at least some offset to these headwinds. This meant that the auction avoided the worst case scenario and allowed the long end to lead the rally during the afternoon, after it lagged the futures driven bid in the belly during the Tokyo morning, likely on pre-auction worry.
• This leaves futures 39 ticks above yesterday’s settlement levels ahead of the Tokyo bell, a touch shy of best levels after the contract moved through its overnight session peak. Cash JGB trade sees the major benchmarks running 1-5bp richer across the curve, bull flattening.
• The latest round of weekly Japanese international security flow data revealed the largest ever round of net sales of Japanese bonds by foreign investors (based on records going back to 2001) as the market tested the BoJ’s resolve when it comes to the upper boundary of its permitted 10-Year JGB yield trading band. Foreign investors shed a net Y4.8tn of Japanese paper during the week.
• Local headline flow was dominated by comments from ex-FX policy chief Nakao, as he suggested that intervention to stem the recent run of JPY weakness cannot be ruled out.
• Looking ahead, national CPI data and the latest address from BoJ Deputy Governor Amamiya headline local matters on Friday.