JPY Swaps: Earlier swaps bid; Barclays sees steeper 5s/10s JGBs

Baloon inflation night 9 Jul 2020
The 5-10y area of the JPY swap curve saw some paying despite slower-than-expected inflation in Tokyo. 5y offers emerge in the afternoon.

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  • JGB future rallies after Tokyo inflation data

  • 5y offers emerged after earlier bid

  • 5s/10s JGBs seen steeper - Barclays


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JGB future rallies after Tokyo inflation data

JGB future rallied strongly especially after lunch break, despite the selloff in the USD rates market in overnight trading and some strong domestic data.


2- to 30-year US treasury yields all rose to above 4% on Thursday as a smaller-than-expected jobless claims data reinforced the market’s outlook on more US Fed hikes to come.


Official data released earlier today showed that jobless rate in January was 2.4%. Economists had forecast it to stay unchanged at 2.5%.


Dealers said the rally in JPY rates has been partly an aftermath of a strong 10-year JGB sale on the previous day, and on optimism on today’s bond buying operations by the BOJ. Inflation in Tokyo was down sharply from 4.4% in the previous month to 3.4% in February, easing some of the worries over an aggressive BOJ although the majority of the market players now expect some monetary policy changes by June following the first extensive hearings of the incoming BOJ Chief Kazuo Ueda, according to the latest survey by Bloomberg.


In mid-afternoon Tokyo trading JGB future was up 26-ticks at 146.89, and the yield on the benchmark 10-year JGB was unchanged at 0.5%.



5y offers emerged after earlier bid

In swaps, the 5- to 10-year area some busy flows with direction more affected by the selloff in the USD rates market and the strong domestic jobs data.


5-year, for example, traded up to 5.25bps higher of 0.47% around mid-day, but was offered down 0.5bp to 0.4125% in the afternoon session. 10-year was also paid up 4.5bps intraday but traded only a tad higher in the afternoon session.


2s/10s swaps steepened up by a basis point to 65.25bps.



5s/10s JGBs seen steeper - Barclays

During confirmation hearings and Q&A sessions, BoJ Governor-nominee Kazuo Ueda hinted at scope of revising the monetary policies going forward, although he also stuck to the views of the current leaders around existing policy management. This indicated some directionality around monetary policy management during the revision to/exit from current policy, according to a research piece from Barclays.


The bank noticed that the rapid bull-flattening in the first half of this week suggested that the JGB curve has largely completed the move it expected in the over-10y sector under its YCC phaseout scenario. However, with the upward momentum in the yields in the US and EU markets, the fair level of 10y JGB yields could be prone to rise and see substantial scope for bear-steepening in the 5-10y sector.


As such, the team has shifted their favour to 5s/10s JGBs steepeners and closed their prior recommendation to short JGB 5s10s20s flys. “Although 5s10s spreads are trending around the mid-30bp level, if 10y JGB yields recover to fair levels after YCC revision, the 5s10s spread can be expected to widen to around 60-65bp with the rise in yields, suggesting there is substantial upside,” Barclays said.