Twisting Steeper After Soft Liquidity Enhancement Auction For Long OTRs

The longer end of the JGB curve struggled in afternoon dealing after the latest 15.5- to 39-Year liquidity enhancement auction saw a very wide tail (albeit with a more favourable average yield spread when compared to the previous auction), while the cover ratio remained little changed around the 2.00x level. Market vol. and a relative lack of BoJ control over the area of the curve covered by the liquidity enhancement auction, and the fact that liquidity enhancement auctions cover the less liquid, off-the run JGBs, likely limited bidders when it came to the overall aggression shown at today’s auction, resulting in the wide tail. The curve has twisted steeper on the day post-auction, pivoting around 10s.

• Futures are off of post-auction reaction lows, but still sit comfortably below late morning levels, last +8. Note that futures had already softened a little during the morning session, owing to the move in U.S. Tsys.
• Note that 10-Year JGB yields remain pinned to the 0.25% mark, even with the BoJ outlining its plan to enforce the top end of its permitted -/+0.25% trading band over the next few sessions (after being drawn into the market yesterday).
• Messrs Kuroda & Suzuki offered little new of the FX front, with Suzuki stressing that the matter didn’t present a major point of discussion in the latest G7 FinMin & central banker meeting.
• Elsewhere, local reports noted that Japan’s ruling LDP and its junior coalition partner have agreed to compile an extra budget for FY22, as the government seeks to finance a relief package that is focused on alleviating the inflationary burden faced by households and businesses.
• National CPI & flash PMI data headlines Friday’s domestic docket.