Post-BoJ Pressure Continues, Market Moves Toward Test Of BoJ’s Resolve After YCC Reset

Tokyo faded the overnight uptick in JGB futures from the off, with the contract closing -38, at worst levels, with the post-BoJ impulse still being felt.

• A lack of unscheduled BoJ Rinban operations helped the space to cheapen beyond the initial bias lower during the morning session.
• The BoJ did step in with some paltry purchases in the 3- to 10-Year zone, but is more and more cognisant of market functioning issues, given that it now owns over 50% of outstanding JGBs and is set to upsize Rinban purchases in Q123. The limited size of the off-schedule operations meant that the relief rally in paper out to 10s was very shallow and short lived, with futures going on to make fresh session lows later in the day (albeit failing to test yesterday’s post-BoJ base).
• The cheapening wasn’t uniform, with the narrowing of the spreads at the latest liquidity enhancement auction covering off-the-run 15.5- to 39-Year JGBs supporting the long end.
• The broader cash JGB curve twist flattened as a result, with 5s & 7s leading the weakness, running ~8.5bp cheaper, while 20s through 40s firmed by ~1.5bp. 10-Year JGB yields moved towards the new YCC cap, last ~0.485%, as the kink in the curve and recent breaking of the BoJ’s will emboldened participants.
• There hasn’t been much in the way of domestic headline flow to note, outside of Economy Minister Goto trying to reaffirm the message provided by BoJ Governor Kuroda, in that yesterday’s YCC adjustment doesn’t represent a tweak, nor an exit from monetary easing.
• Weekly international security flow prints and lower tier data headline locally on Thursday, with the outdated minutes from the BoJ’s Oct meeting also slated.