JPY Swaps: Swap rates spike, curve steepens to new high after BOJ's YCC surprise

BOJ Governor Kuroda
The BOJ hinted a hawkish stance through its surprising YCC adjustment, triggering a spike in swap rates and steepening to 10-year.

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  • JGB future dives by more than 2 points after BOJ’s new YCC

  • Curve steepens to fresh high, 10y swap rate spikes

  • Long-end flatter as 10y underperforms

  • New issues



JGB future dives by more than 2 points after BOJ’s new YCC

Players in the Japanese market were caught completely off guard. While the Bank of Japan decided to keep benchmark interest rate unchanged at -0.1% as had been widely expected, it announced at the conclusion of its last monetary policy meeting of the year that it would expand its target band for 10-year JGB yields from 25bps to 50bps to add more flexibility to the central bank's monetary policy. Such an adjustment to its yield curve control (YCC) hinted a long-awaited hawkish stance after months of wide interest rate divergence and followed the country’s core inflation hitting its 40-year high in November. Market participants said the BOJ’s move was a clear move to test the market about an exit strategy.


The market reaction was inevitably wide.


The yen strengthened sharply against the USD, and the pair dived from intraday high of near 137.5 to 133. Some players predicted further downside to below 130 when the US market opens later today. The Nikkei plummeted by more than 3%, and JGB future slumped by a massive 2.34 points before recovering to 1.56 points lower of 146.28 in mid-afternoon Tokyo trading. The yield on the benchmark 10-year JGB shot up by 15.5bps to 0.405% to reflect the new YCC band.



Curve steepens to fresh high, 10y swap rate spikes

JPY swaps were bid before the BOJ, and more panic though cautious and thus light-volume paying afterwards. The curve steepened up to 10-year before flattening beyond that point.


10-year traded in a tight range around 1.25bps higher of 0.6625% in the morning before traded all the way up to 0.8% after the BOJ, steepening 2s/10s swaps by 5.75bps to their fresh high of 55.5bps although 2-year also traded briefly at 9.25bps higher of 0.245%.


2-year was marked at its fresh high of 0.225% at time of writing.



Long-end flatter as 10y underperforms

5-year went through up to 13.5bps higher of 0.47% before being marked at its fresh high of 0.45%. 2s/5s swaps steepened up by 4.25bps to their new high of 22.5bps.


30-year was marked only 4.25bps higher of 1.2675% at time of writing although it traded briefly through 1.37% in the afternoon session.


10s/20s and 10s/30s swaps were 6.5bps and 7.5bps flatter at 35.5bps and 49bps respectively.



New issues

  • Mizuho Financial self-led JPY77bn in 1.589% perpetual bonds with semi-annual call at par from June 2028. Priced at JGBs + 142bps.


  • Sumitomo Life raised JPY50bn via selling 1.67% December 27, 2082 callables with annual call at par from December 2028.