JPY Swaps: 2y bid after joint statement news; Barclays sees long-end flatter

• 2y bid after joint statement news; 2s/10s flatter

• 7y given after earlier bid; Long-end steeper on SL bid

• 3m10y JGB yields too low - Barclays

• Long-end to see stronger bear flattening

• New issues

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2y bid after joint statement news; 2s/10s flatter

JGB future extended gains today, with a clearer uptrend after lunch break when it was up by 33-ticks before closing the day 13-ticks higher at 146.86. The yield on the benchmark 10-year JGB was down 1.5bps at 0.47%.

USD/JPY saw some drastic move after lunch break, dipping from intraday high of 130.29 to 129.2, after news that the BOJ and the Japanese government should make a new joint statement, and following recommendations by a panel at the Japan Productivity Center that the 2% inflation target should stay as a long-term goal.

The sudden strength in the yen prompted paying in 2-year at up to near 0.21% in mid-afternoon Tokyo trading. This was after some receiving at down to 1.5bps lower of 0.1725% in the morning.

2s/10s swaps flattened out by 1.5bps to 67.75bps intraday, with the flattening backed by better receiving in 10-year.

A dealer reported offered-side flow in 10-year at down to just a tad above 0.855% in mid-morning domestic trading, down from previous close of 0.8775%.

7y given after earlier bid; Long-end steeper on SL bid

Slightly down the curve, 7-year was slightly better bid in the morning when it traded in a tight range around 1.25bps higher of 0.665%. It then turned better offered and traded at 0.64% when the positive momentum in the lead bond future built up.

20-year has been mostly bid in the afternoon session and was last traded 1.5bps higher. 10s/20s swaps steepened up by 2.75bps to 46.5bps.

3m10y JGB yields too low - Barclays

The summary of opinions from the January MPM suggests there are still two hawks on the BoJ Policy Board even after the December policy revisions, according to a recent strategy piece from Barclays. This could reinforce market convictions that the BoJ will move toward further revisions at a meeting in the near future.

During the decline in yields since the January MPM, 3m10y JGB yields have come under strengthening downward pressure to around 0.5%. Barclays believes that this indicates that long-term yields have fallen to the point of fully pricing in an outlook for the current policy capping long-term yields at 0.5% to continue for three months. However, a decline to this level appears overdone given that the current policies already appear unsustainable.

Long-end to see stronger bear flattening

Barclays also noticed that long-term forward yields may be vulnerable to downward pressure to price in the negative impact to the real economy of policy revisions. Any yield rise in the over-10y sector will be limited when compared with the 7-10y sector.

The team therefore expects the bear flattening bias in the over-10y sector of the JGB curve to be more pronounced further out the curve due to the following reasons:

• Life insurers’ net purchases of superlong JGBs tend to increase more in Q1 than at any time of the year, with the figures especially pronounced in January and February during the past two years.

   

• If there is a strengthening view in the market that the upside in yields will be more limited in longer sectors even under a scenario of further YCC revisions, there should be an increase not only in life insurer demand to buy superlong JGBs on an outright basis, but also in curve trader demand to build/accumulate flatteners with long positions in the superlong sector.

As such, Barclays expects the JPY curve to show a stronger flattening bias in the superlong sector.

New issues

• Rakuten Group sold JPY250bn in 3.3%, February 10, 2025 bonds.