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 25 November 2022, with the auction drawing cover of 2.355x at a high yield of 1.580%, low price of 83.06, with 1.7341% of bids allotted at the high yield.

• The uptick in yields in lieu of the BoJ’s Dec YCC tweak and based on the market speculation surrounding the BoJ’s Jan meeting, coupled with the stabilisation on the lack of movement in the BoJ’s YCC parameters at the end of its Jan meeting and tweaks to tools in a bid to backstop the mechanism, should provide smooth enough takedown of today’s supply.
• The above factors will likely combine with the potential for increased capital deployment from the domestic life insurer and pension fund community, who repatriated capital from offshore bonds in ’22, given the well-documented pull higher in FX hedging costs and the uptick in market vol.
• Worries about future challenges to and tweaks of BoJ policy settings will likely prevent the auction from being as strong as it otherwise would be.
• Using 40s as a long leg to flattener trades isn’t completely out of the question, but we doubt that will be a strategy in favour ahead of today’s auction given the negative carry aspect of such positions and length of time until the BoJ’s March meeting.
• The lack of hedgability owing to dislocation in the JGB futures market is negative for demand.
• Results are due at 0335GMT/1235JST.