Strong 40-Year Auction Pricing Promotes Twist Flattening

JGB futures hold on to their post-40-Year auction bid after some light richening in U.S. Tsys allowed the contract to tick away from session lows ahead of the Tokyo lunch break. That leaves the contract -23 as we head into the final hour of Tokyo trade, albeit nowhere near fully reversing the overnight weakness generated by a reduction (not a removal) in fear surrounding the global banking sphere. The well-received auction has prompted twist flattening of the wider JGB curve, with the major benchmarks now running 1.5bp cheaper to 8.5bp richer, pivoting between 10s and 20s. The swap curve has also twist flattened, with swap spreads generally flat through 10s and wider beyond there.

• Various policymakers have stressed the relative soundness of the Japanese banking sector, while soon to be departing BoJ Governor Kuroda has gone over old ground re: inflation and the need for continued easing.
• Japanese investing giant Dai-Ichi Life flagged a shift in capital allocation to JGBs from U.S. Tsys and other foreign securities, given the well-documented, elevated currency hedging costs imposed on the Japanese investor base at present. ALM duration matching activity sees Dai-Ichi preferring 30- & 40-Year JGBs, per the BBG interview. The firm also flagged a want to deploy capital in alternative assets as it looks to boost returns (private equity, real assets and hedge funds are potential destinations for their capital).
• Looking ahead, BoJ Rinban operations (covering 3- to 25-Year JGBs) headline domestically on Wednesday.