JPY Swaps: Kuroda sees short-term rate below -0.1%; 7-10y bid; 2s5s7s fly idea

• Kuroda sees short-term rate below -0.1%; 7-10y bid

• Long 2s/5s/7s JGBs - Barclays

• New issues

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Kuroda sees short-term rate below -0.1%; 7-10 bid

JGB future lost as much as 58-ticks in the morning session as it followed the move in the USD rates market in overnight trading.

On Thursday, US equities surged, and US treasury yields spiked with policy-sensitive 2-year yields shotting up 15.7bps to above 4.13% as news about 11 banks joining hands to rescue First Republic Bank. Players also revised their interest rate outlook as they feared the US Fed would be more comfortable about further tightening after ECB’s half a percentage point of interest rate hike. The market is now pricing in more than 80% of chance the US Fed would raise interest rate by 25bps next Wednesday.

The lead bond future trimmed losses after lunch break, with a more significant move seen since mid-afternoon domestic trading following news about BOJ, FSA and the government planning a meeting later today on the markets after the SVA incident. JGB future was marked just a tick below yesterday’s close after the still BOJ Governor Kuroda said it is possible to lower short-term interest rate to lower than the existing -0.1%. It finally closed the day 17-ticks lower at 148.27, and the yield on the benchmark 10-year JGB was 1.5bps higher at 0.284%.

7-year swaps have been well bid throughout the day, with trades at up to 10bps higher of 0.47% in early morning domestic trading. Paying eased in the afternoon session when it traded around 3bps higher. 10-year traded in a tight range around 3.5bps higher of 0.595% in the morning session. Paying intensified after lunch break and it traded up to above 0.6%

Long 2s/5s/7s JGBs - Barclays

In a strategy pieced released on Thursday, Barclays expressed that it expected the JPY rates market to adjust down its expectations for an early BOJ policy revision following the global turmoil in the financial markets of late. It said it would favour minimizing duration and curve risks and focus on tactical RV trades.

The strategy team noticed that in the short- to medium-term sector, the cheapness of the 5-year sector on the JGB curve stood out. The 5s/7s spread had tightened sharply from more than 20bps to well below 10bps, returning to levels seen prior to last December’s policy revisions. On the other hand, the 2s/5s spread had only tightened from the upper-20bps to around 20bp, leaving the 2s/5s/7s butterfly spread at an elevated level around the upper bound of the recent trading range. By referencing data for the past year, the 2s/5s spread was indeed wide compared with the 5s/7s or 5s/10s spread, indicating that this portion of the curve stayed steep relative to the over-5y sector. According to Barclays, this indicates that:

• There is more scope for tightening of the 2s/5s spread than the 5s/7s spread if yields fall further.

• There is more scope for widening of the 5s/7s spread than the 2s/5s spread if yields rise.

This suggested that investors could be expected to profit from cheapening of the 5-year sector without taking a view on the direction of duration. As such, the team recommended to long JGB 2s/5s/7s flys as a tactical relative value trade with elevated risk-reward.

New issues

• Central Nippon Expressway priced JPY30bn in 0.44%, March 28, 2028 bonds at JGBs + 29bps.

   

• Inabata & Co Ltd issued JPY7.5bn in 0.65%, March 24, 2028 bonds.