JPY Swaps: BNP sees 50% chance of wider YCC; Busy 5-10y bid

• BNP sees 50% chance BOJ to widen YCC band

• SL bid as JPY seen weaker; Busy 5-10y flow

• New issues

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BNP sees 50% chance BOJ to widen YCC band

The BOJ is due to meet tomorrow and conclude this month’s monetary policy meeting on Friday, and market participants have split views on how Kuroda would end his career in the central bank. Most economists expect him to leave its YYC settings and negative-rate policy unchanged, despite worsening in the JGB market dysfunction since the BOJ widened the YCC band in December.

BNP Paribas, however, sees a 50% chance that the BOJ will widen the YCC target band for the 10-year rate to 0%±100bps, considering the cost and potential risk of waiting. Even if it does not make that call this week, it would do so no later than June, according to a strategy piece by BNP that was released on Tuesday.

The team expects the central bank to leave its short-term policy rate at –0.1% for some time, but will terminate the negative interest policy and scrap YCC in Q4 2024, after thorough policy review and confirming a global recovery. At the same time, long-term rates will likely be kept loosely capped as a form of insurance. The reason behind is that Japan's public debt is already so massive at over 250% of GDP that a surge in long-term interest rates could end up posing existential challenges for fiscal sustainability.

BNP noticed that the functioning of the JGB market has weakened, resulting in an extremely skewed yield curve with yields on 10y off-the-run JGBs falling more than 40bp from the current 10y JGB. This would only get worse if the BOJ doesn’t widen its YCC range in March or make some technical changes to the SLF, according to BNP.

SL bid as JPY seen weaker; Busy 5-10y flow

JGB future was sold off from the entire day, partly due to the hawkish US Fed comments and as some players prepared for the widening of the YCC band. It trimmed losses after lunch break and closed the day 8-ticks lower at 146.79 after losing 18-ticks in earlier trading. The yield on the benchmark 10-year JGB was marginally lower at 0.498%.

USD/JPY has been trending higher since overnight trading. There have been speculations about further weakness in the yen due to the hawkish US Fed, and market talks are for the pair to make an upside break above 138 in the very near future.

The pair traded up to above 137.9 after lunch break in Tokyo.

This has backed paying interest at the superlong-end of the JPY swap curve. 20- and 30-year traded up to 3bps and 4bps higher of 1.25% and 1.28% respectively.

The 5- to 10-year area has been busily traded, backed by good paying interest there. 10-year went through in a tight range around a basis point higher of 0.845% in the morning session before paying intensified after mid-day and traded up to 4bps higher of 0.875% in the afternoon session. At the mid-sector, 5- and 7-year traded at up to 4bps higher of 0.455% and 0.65% respectively.

New issues

• Akita Prefecture priced JPY10bn in 0.75%, December 20, 2032 bonds at 25bps over JGBs.

   

• Central Glass Co sold JPY8bn in 0.35%, March 13, 2026 bonds.

   

• Chubu International Airport issued JPY15bn in 0.26% March 17, 2028 bonds.

   

• Fukuoka City priced JPY10bn in 0.75%, March 28, 2033 bonds at JGBs + 25bps.

   

• Hokkaido Prefecture raised JPy10bn via selling 0.334%, March 24, 2028 bonds at 12bps over JGBs.

   

• Japan Metropolitan Fund Investment Corp sold via Mizuho JPY4bn in 0.85%, March 15, 2030 bonds.

   

• Kyoto City priced JPY10bn in 0.334%, March 22, 2028 bonds at 12bps over JGBs.

   

• Okayama Prefecture raised JPY10bn via selling 0.75%, March 31, 2033 bonds at JGBs + 25bps.