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 17 November, the auction drew cover of 3.035x at an average yield of 1.029%, average price of 101.16, high yield of 1.039%, low price of 101.00, with 22.0618% of bids allotted at the high yield.

• 20s are a touch cheaper in outright terms vs. levels that prevailed at the prior auction (by ~5bp), operating ~5bp or so from cycle cheaps. The outright stabilisation observed in recent weeks, coupled with less worry re: JGB issuance to finance the country’s increased spending, should support takedown.
• 20s have cheapened a little on the 10-/20-/30-Year butterfly in recent sessions, aided by the anchoring of 10-Year JGB yields via the BoJ’s YCC mechanism, presenting slightly more appealing relative value on that structure vs. what was seen at the time of the November auction, albeit with the structure operating off of YtD extremes.
• 20s also provide the most attractive carry and roll proposition on the curve, which should support demand given that most do not expect some form of BoJ policy tweak until after Governor Kuroda departs (in April).
• A reminder that ongoing market vol. and elevated FX hedging costs, as well as the steep JGB curve (a function of BoJ YCC), have combined to generate a home bias amongst domestic life insurers and pension funds, which should underpin demand, resulting in smooth enough passage of supply.
• Results due at 0335GMT/1235JST.