Swap Payside Flow Helps Futures Unwind Overnight Gains

JGB futures have followed the wider core global fixed income space away from overnight highs, with the contract up a mere 7 ticks as we work towards the Tokyo close (40 off the overnight session peak), with domestic equities moving higher and participants perhaps trimming short-term long positions after the rally from cycle cheaps.

• Cash JGBs sit 0.5bp richer to 1.0bp cheaper across the curve, with the curve steeoening as 30+-Year paper cheapens. Note that swaps lagged the early catch up rally observed in the cash JGB space, while the swap spread widening persisted as we moved through Tokyo trade as swap payside flows came to the fore, potentially aiding the cheapening/steepening themes.
• A quick reminder that our policy team have flagged their understanding that the Bank of Japan may be leaning towards taking its overnight rate out of negative territory rather than raising the upper limit of its yield control range in response to rising inflation and to ease speculative pressure as other major central banks tighten policy.
• There was little in the way of meaningful domestic headlines to impact the space, with continued news flow surrounding the Sakhalin 2 situation and impending upper house elections providing no real impetus for markets.
• Looking ahead, 10-Year JGB supply and wage data headline domestic matters tomorrow.