PREVIEW - 10-Year JGB Auction Due

The Japanese Ministry of Finance (MOF) will today sell Y2.7tn of 10-Year JGBs, re-opening JB#372. The MOF last sold 10-year debt on 2 November 2023, the auction drew cover of 3.622x at an average yield of 0.910%, an average price of 99.00, a high yield of 0.915%, a low price of 98.95, with 7.4052% of bids allotted at the high yield.

• The auction held last month presented a mixed picture in terms of demand metrics. The low price met wider expectations, but the tail lengthened, and the cover ratio declined to 3.622x from 3.934x at the October auction. It is worth noting that November’s cover ratio was the second lowest seen at a 10-year auction since Aug’22.
• It is also worth mentioning that November’s supply came two days after the BOJ introduced a new level of flexibility to its yield curve control (YCC) by suspending the daily fixed rate operation on 10-year JGBs. The BOJ's decision to define the 1% upper YCC limit as a "reference". The exact extent of this newfound flexibility remains a topic of discussion.
• Today's supply also comes after poor outcomes for the most recent 2- and 40-year JGB auctions.
• The current 10-year auction is taking place with an outright yield approximately 20bps lower than the early November offering. The 2/10 yield curve is 13bps flatter than the levels observed in early November.
• However, today's auction occurs amidst newfound bullish sentiment towards long-end global bonds, exemplified by the US tsy 10-year yield sitting some 70bps below its cycle peak set in late October.
• It's also 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 around its highest point in this market cycle.
• Against this backdrop, it will be intriguing to observe whether the relatively lower 10-year yield, will prove sufficient to generate demand at today's auction.
• Results are due at 0335 GMT / 1235 JT.