PREVIEW: 5-Year JGB Supply Due

The Japanese MOF will today sell Y2.5tn of 5-Year JGBs re-opening JB#151. The MOF last sold 5-Year debt on April 12, the auction drew cover of 3.614x at an average yield of 0.027%, average price of 99.89, high yield of 0.029%, low price of 99.88, with 91.6838% of bids allotted at the high yield.

• Outright 5-Year yields don’t look particularly compelling, operating off of cycle highs and within the lower end of the narrow range witnessed over the last couple of months.
• There shouldn’t be much in the way of steepener interest based on a long leg in 5s, owing to an already steep (in an international and local context) JGB yield curve, which would dissuade participants from entering the likes of a 5-/30-Year steepener, and the BoJ’s commitment to its current YCC settings, which would dissuade participants from entering the likes of a 5-/10-Year steepener. Meanwhile, the 2-/5-Year yield spread operates around the middle of the range witnessed in recent months. Some may look to enter flatteners here, based on BoJ policy.
• The 2-/5-/10-Year butterfly hovers around the middle of the recently observed range.
• Meanwhile, hedging for higher interest rates has driven the 5-Year swap spread to multi-year highs in recent weeks. Some may still be chasing higher rate hedges, but we wouldn’t expect much in the way of notable demand as part of swap spread wideners.
• The above mix suggests that a smooth digestion probably represents the best possible outcome at today’s auction, with risks tilted towards a softer auction.
• Results due at 0435BST/1235JST.