JPY Swaps: 10y yield below 0.25% again; 5-10y given; 20y JGB shorts covered?

Price charts 25 Nov 2021
Worries over the US banking sector has supported further rally in JPY rates. 5-10y swaps have been offered and 10y yields hits below 0.25% again.

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  • JGB future spikes; 10y JGB yield below 0.25% again

  • 5-10y offers. 2s/10s flatter

  • BNP eyes short-covering 20y JGB

  • New issues


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JGB future spikes; 10y JGB yield below 0.25% again

JGB future rallied hard today, despite after news about UBS’s agreement to buy Credit Suisse. The move was prompted by the drastic rally in US treasures on Friday when 2-year US treasury yields plummeted by 34bps, as players unwound their bets on further US Fed hikes and shifted to betting for an easing this year following heightened anxiety over the health of the banking sector. There was evidence of funding stress in the US following the failure of SVB too, as US banks have borrowed a combined USD164.8bn in recent weeks. Additionally, there have been a lot of question marks whether the rescue of First Republic by several US banks would stop the crisis from happening. The breakeven inflation rate for the 10-year linker also fell 7bps, indicating that the market has changed their views on the economic growth in the US.


The upward momentum intensified in the afternoon session and JGB future closed the day 72-ticks higher at 148.99, and the yield on the benchmark 10-year JGB was about 4bps lower at 0.245%, or below the previous band set by the BOJ.



5-10y offers. 2s/10s flatter

There has been good amount of activity in swap trading even before the US Fed meeting in the middle of the week.


10-year, for example, was offered down 1-3bps lower in the morning but traded down to 4.5bps lower of 0.555% in the afternoon session. 5-year traded a few basis point lower and was last seen changing hands 4.5bps lower of 0.2175%. 7-year, on the other hand, traded mostly between 0.375% and 0.385%, down from previous close of 0.4075%.


2s/10s swaps flattened out by 4.5bps to 44bps.



BNP eyes short-covering 20y JGB

20-year JGB yield has fallen by 30bps since the fall over of the US banking sector last week. BNP Paribas considered that the richening in 20y JGB owes much to the spill-over impact from short-cover for 10-year YCC bonds, especially after the BOJ tightened the SLF (bond lending) rules, such as increasing the borrowing fee from 25bps to 100bps and reducing the offer, on 16 February, and following a pause when the central bank held its policy meeting on March 10. In its view, the 20-year JGB carries a 10bps premium due to spill-over from short covering of 10-year YCC bonds.


BNP estimated in a strategy piece released on Friday that the spill-over impact is finally fading, as the BOJ’s holdings of YCC bonds are falling below the issued amount. The team is therefore eyeing chances of covering its earlier short in 20-year JGBs when it reaches a better level in March. The target is currently 1.2%, and the bank entered it at 1.22% at the beginning of this month.