PREVIEW: 20-Year JGB Supply Due

The Japanese MOF will today sell Y1.2tn of 20-Year JGBs, re-opening JB#182. The MOF last sold 20-Year debt on 18 October, the auction drew cover of 3.263x at an average yield of 1.123%, average price of 99.62, high yield of 1.133%, low price of 99.45, with 57.5980% of bids allotted at the high yield.

• Baseline demand will likely come via the life insurer and pension community, with elevated FX-hedging costs and continued market volatility limiting that particular cohort’s demand for offshore bonds.
• However, the pull away from outright cycle cheaps in 20-Year JGBs may limit overall demand.
• Furthermore, the 10-/20-/30-Year JGB butterfly has also moved away from cycle cheaps I tecent weeks, pointing to a less compelling RV approach (even with 20s providing the most attractive carry and proposition on the curve at present).
• Still, outright yield levels and the level of the likes of the 10-/20-/30-Year butterfly shouldn’t prove to be impediments for demand at auction.
• Furthermore, the auction should benefit from the recent tweaks to the BoJ’s Rinban plans, which included an additional round of purchases per month in this sector of the curve.
• These supportive factors should facilitate a smooth auction, even with some relative and outright valuation headwinds apparent.
• Results due at 0335GMT/1235JST.