PREVIEW: 20-Year Supply Due

The Japanese MOF will today sell Y1.2tn of 20-Year JGBs re-opening JB#180. The MOF last sold 20-Year debt on May 20, the auction drew cover of 3.765x at an average yield of 0.757%, average price of 100.74, high yield of 0.759%, low price of 100.70, with 68.5886% of bids allotted at the high yield.

• The well-documented breakdown in market functioning amid a challenge of the BoJ’s resolve when it comes to the enforcement of the upper end of its permitted 10-Year JGB yield trading band presents the obvious headwind when it comes to today’s auction, even with 20-Year JGB yields hovering just shy of the recently minted cycle highs and apparent cheapness evident on the likes of the 10-/20-/30-Year butterfly structure. The well-documented basis issues hamper the hedging ability of futures, while the potential for further tests of the BoJ’s resolve provides further issues. This also provides some counter to the carry argument, with 20s currently providing the most attractive carry and roll proposition on the curve.
• Note that there is the potential for domestic life insurers to provide at least some counter to these negatives given their previously outlined semi-annual investment intentions, although most desks remain cautious ahead of supply.
• Short covering demand may provide some offset to the previously alluded to headwinds.
• Also note that some desks have indicated the attractiveness of long ASW positions.
• Results due at 0435BST/1235JST.