PREVIEW: 10-Year JGB Supply Due

The Japanese MOF will today sell Y2.7tn of 10-Year JGBs re-opening JB#367. The MOF last sold 10-Year debt on Jul 5, with the auction drawing of 5.046x at an average yield of 0.248%, average price of 99.53, high yield of 0.250%, and low price of 99.51, with 26.6152% of bids allotted at the high yield.

• The recent BoJ defence of its YCC parameters and continued insistence that it’s current policy settings are appropriate will likely facilitate demand at auction, with 10-Year JGB yields now operating ~8bp shy of the upper boundary of the Bank’s permitted trading range. Still, this isn’t a clear and definitive positive, with the distance below the “ceiling” perhaps a challenge, at least in optical terms, when comparing auction results to the most recent offerings.
• This auction could serve as a liquidity event for any remaining shorts in the offshore investor community (who were a key driver of June’s challenge of the BoJ’s YCC settings), which would be a positive for demand.
• Wider worry re: recession in the U.S. & Europe will likely provide some demand.
• The recoupling of JGB futures to CtDs also promotes the hedgability of the auction, a positive for demand.
• In terms of relative value, the line doesn’t look particularly chaep on say the 5-/10-/-15-Year fly, after the richening observed in June, with a lack of clear relative value appeal evident vs. swaps. Still, the recent steepening of the 7-/10-Year futures curve back towards YtD highs may draw some interest in flattener positions (vs. cash or futures).
• Results are due at 0435BST/1235JST.