PREVIEW: 40-Year JGB Supply Due

The Japanese MOF will today sell Y700bn of 40-Year JGBs re-opening JB#15. The MOF last sold 40-Year debt on May 26, with the auction drawing cover of 2.416x at a high yield of 1.070%, low price of 97.74, and 53.1502% of bids allotted at the high yield.

• Outright 40-Year JGBs operate just off of cycle cheaps, within touching distance of the 1.50% level.
• This, alongside the steepness of the domestic curve (in a local and international sense), with 5-/40-, 10-/40-, 20-/40- & 30-/40-Year yield spreads at/near cycle steeps, the Japanese investor base’s aversion to adding to international debt holdings owing to elevated FX-hedging costs and ongoing international market volatility (as evidenced by Japanese weekly international security flow data, which has shown continued shedding of foreign bonds over the last 2 months) and the preference of domestic life insurers to add to their super-long JGB holdings (per their semi-annual investment intention interviews) should all prove to be supportive for takedown at auction.
• The recent recoupling of the 10-Year futures/cash basis & wider recession risk centred on the U.S. & Europe should also be supportive when it comes to demand.
• The lack of relative BoJ control over this area of the curve and potential ‘scarring’ from the latest round of cheapening in the super-long end may provide incrementally limiting factors when it comes to wider demand.
• Results are due at 0435BST/1235JST.