PREVIEW: 20-Year JGB Supply Due

The Japanese MOF will today sell Y1.2tn of 20-Year JGBs re-opening JB#181. The MOF last sold 20-Year debt on Jul 14, the auction drew cover of 3.632x at an average yield of 0.902%, average price of 99.95, high yield of 0.908%, low price of 99.85, with 6.2008% of bids allotted at the high yield.

• Outright, 20s have richeend away from cycle cheaps, with global core FI markets off of their respective extremes on the back of moderations in market pricing surrounding the terminal rate of the U.S. Fed’s current tightening cycle and an uptick in recession-related worry in Europe & the U.S. This may represent a negative for demand.
• 20s have richened on the 10-/20-/30-Year butterfly and now sit at the richer end of the range employed since June, with the JGB curve pulling back from cycle steeps, which should provide some headwinds for demand.
• Still, elevated FX-hedging costs and continued market vol. have generated a home bias for Japanese investors deploying capital in the bond market in recent months, with the last 4 weeks of international security flow data only revealing a relatively modest re-deployment of capital into offshore bonds.
• This, coupled with lifers’ intentions to lift super-long JGB holdings provides a positive for demand at today’s auction.
• All in, we would expect the positives surrounding today’s auction to result in a baseline level of demand which should mean that any disappointment in pricing/auction cover only sees a limited market reaction.
• Results due at 0435BST/1235JST.