PREVIEW - 10-Year JGB Auction Due

The Japanese Ministry of Finance (MOF) will today sell Y2.7tn of 10-Year JGBs, re-opening JB#371. The MOF last sold 10-year debt on 4 July 2023, the auction drew cover of 4.024x at an average yield of 0.428%, an average price of 99.73, a high yield of 0.430%, a low price of 99.71, with 16.6381% of bids allotted at the high yield.

• Last month's auction displayed an improvement in demand compared to the June auction, and a significant improvement than the May outing, marked by a higher cover ratio and a decrease in the tail. However, it is important to highlight that the May result was notably weak, as its cover ratio reached the lowest level recorded in a 10-year JGB auction since August '22.
• While the highest outright yield since 2014 may entice some investors, today's auction comes in the shadow of the BoJ's decision to tweak yield curve control (YCC) to provide greater flexibility. On Friday, the BoJ announced that the 10-year yield will not be rigidly confined to the 50bp upper band and can exceed up to 1%. Within the range of 0.5% to 1%, the BoJ plans to adjust yields through JGB purchase programs and fixed-rate operations, based on the level and speed of changes. Currently, the 10-year sits at 0.60% up from last Thursday’s closing level of 0.45%.
• A dramatic post-BoJ steepening in the 2/10 yield curve could however provide some offset for investors. So too, the relative affordability of 10-year JGBs compared to futures, indicated by the spread between the 7- and 10-year JGBs, which sits at cycle highs.
• While the bid at longer-dated auctions this fiscal year has tended to benefit from local investors reallocating capital from foreign markets towards JGBs, local participants will be keen to get a read on the impact of last week’s BoJ’s YCC tweak at today’s auction.
• Results are due at 0435 BST/1235 JST.