PREVIEW: 5-Year JGB Supply Due

The Japanese MOF will today sell Y2.5tn of 5-Year JGBs re-opening #JB150. The MOF last sold 5-Year debt on January 12, the auction drew cover of 3.336x at an average yield of -0.041%, average price of 100.23, high yield of -0.037%, low price of 100.21, with 73.6701% of bids allotted at the high yield.

• The Russia Ukraine situation and the fact that outright 5-Year JGB yields have moved to levels not observed since ’15 will likely generate demand at auction.
• On the RV side, the recent rhetoric and action from the BoJ re: the enforcement of the top end of its permitted 10-Year JGB yield trading band may limit appetite for 5-/10-Year steepeners (that dynamic would be compounded by the negative carry of holding such a position), although offshore market dynamics may promote 5-/30-Year steepeners, with dealers potentially using this auction to set the long leg in 5s. Note that the 5-/30-Year JGB yield spread has steepened to levels not observed since early ’19 during the recent global bond sell off. This specific steepener position provides very modest positive carry.
• 5s have cheapened towards the extreme witnessed during calendar ’21 on the 2-/5-/10-Year butterfly, which may facilitate another leg of relative value demand, although the negative carry of such a position clouds this a little (as does the recent BoJ action re: shoring up its support of its YCC mechanism).
• Results due at 0335GMT/1235JST.