Two-Way Session, Curve Twist Steepens

JGB futures have been dragged around by the wider impetus observed in the core global FI space, with the initial uptick reversed by some spill over from the previously outlined weakness in German Bunds. That leaves the contract -5 ahead of the Tokyo close.

• The wider spread downtick in core global FI markets has promoted a further steepening of the JGB curve during the Tokyo afternoon, building on the morning theme, with the major cash benchmarks running 1bp richer to 3bp cheaper, pivoting around 7s. Payside flows in super-long swaps seemed to have helped the long end to cheapen after a couple of days of aggressive flattening of the JGB curve (aided by a well-received round of 40-Year JGB supply)
• Note that the modest bid in the short-end of the curve (2s represent the strongest point) comes in lieu of a well-received round of 2-Year JGB supply. In terms of auction specifics, the low price printed above broader expectations, while the price tail narrowed. The cover ratio came in a little below the six-auction average, but bettered the level observed at the previous auction. The BoJ’s on-hold monetary policy stance likely contributed to the smooth takedown, adding to demand from offshore investors on the lookout for attractive FX-hedged yield pickups on offer, countering negatives from a move away from cycle cheaps (on the BoJ’s decision to stand pat), as well as the steepness of the JGB curve.
• A sidenote that JPY strength was the most notable theme in Tokyo FX trade, as participants reacted to the potential for a slower round of data-dependent Fed hikes in the coming months. Existing short positioning in JPY may have accelerated the move.
• Domestic headline flow has been non-existent, outside of the previously flagged weekly international security flow data which seemingly saw an end of the recent streak of short covering in JGBs on the part of international investors.
• Looking ahead, Friday’s domestic docket will be headlined by Tokyo CPI, retail sales, industrial production and the labour market report. The BoJ will also conduct its latest round of Rinban operations, in addition to releasing the summary of opinions from its most recent monetary policy meeting.