PREVIEW - 10-Year JGB Auction Due

The Japanese Ministry of Finance (MOF) will today sell Y2.7tn of 10-Year JGBs, opening JB#372. The MOF last sold 10-year debt on 5 September 2023, the auction drew cover of 4.019x at an average yield of 0.657%, an average price of 97.63, a high yield of 0.668%, a low price of 97.53, with 74.9127% of bids allotted at the high yield.

• The auction held last month presented a mixed picture in terms of demand metrics. The low price fell short of broader expectations, and the tail lengthened, reaching its longest point since April. However, there was an increase in the cover ratio.
• Today's supply comes after a series of mixed outcomes in the most recent 2-year and 40-year JGB auctions. The 2-year bond supply only showed sufficient demand, meeting dealer expectations, and witnessing a slight increase in the cover ratio compared to the previous month's auction. It's worth noting that the cover ratio observed in August was the lowest for a 2-year auction since 2010. In contrast, the 40-year supply experienced better demand metrics, with the high yield falling short of expectations, and the cover ratio increasing. However, it's also worth mentioning that the cover ratio in the previous auction (May) was the lowest seen at a 40-year auction since November 2022.
• The current 10-year yield sits at a cycle high of 0.774%, some 12bps higher than what was seen at time of the September auction.
• The situation is similar when examining the 2/10 yield curve. It is ~8bps steeper than the levels observed in early September. Furthermore, it has reached a cycle high and is the steepest it has been since 2013.
• Nevertheless, it's worth noting that the relative affordability of 10-year JGBs compared to futures, as indicated by the spread between the 7- and 10-year JGBs, is currently at its highest point in this market cycle.
• Overall, while longer-dated auctions earlier in the fiscal year benefited from local investors shifting capital away from foreign markets toward JGBs, this dynamic has shifted somewhat following the BOJ’s YCC adjustment in late July.
• Results are due at 0435 BST/1235 JST.