JPY Swaps: Longs given as inflation cools; 2s/5s/10s swaps idea

• JGB future extends gains as inflation cools

• Good 10y offers flatten 2s/10s; Superlongs given

• Short 2s/5s/10s swaps – BNP Paribas

• New issues

Click here for SDR JPY IRS trades

JGB future extends gains as inflation cools

JGB future extended gains today, but not as wild as on Thursday. The move was mostly backed by the rally in the USD rates market on the previous day, and as domestic inflation data eased and was in line with expectation.

Front-end US treasuries soared on Thursday as players scrambled to increase their bets on a pause as soon as May, and deeper cuts this and next year. 2-year US treasury yield slumped by 15bps intraday, widening 2s/10s by almost 10bps. The market is now pricing in only around 10bps of further US Fed hike, and 200bps worth of cuts by the end of 2024.

Official data released earlier today showed that inflation in February was 3.3%, down from 4.3% in the previous month and matching economists’ expectation.

In mid-afternoon Tokyo trading JGB future was up 8-ticks at 148.6, and the yield on the benchmark 10-year JGB was 2bps lower at 0.28%.

Good 10y offers flatten 2s/10s; Superlongs given

In swaps, a dealer reported good amount of flow in 10-year since market open, backed by better receiving there. It traded a tad lower of 0.58%-0.5825% in the morning session before clearer receiving interests emerged after lunch break. 10-year then went through down to 0.575% but reverted to trade in a tight range around 0.58% near market close. The source reckoned timid receiving in 10-year was in part driven by players turning cautious ahead of the fiscal year-end.

2s/10s swaps flattened out by a basis point to 46.75bps, as 2-year only traded almost unchanged at around 0.105%.

Receiving has also extended to the superlong-end of the curve. 20-year, for example, traded down to 1.25bps lower of 1.0275%. 30-year, which had recovered to levels above 1% since early last week, went through a basis point lower of 0.995% in the morning session.

Short 2s/5s/10s swaps – BNP Paribas

BNP Paribas took a look at the historical performance of 2s/5s/10s swaps in a strategy piece released on Thursday. The team noticed that prior to 2013, the fly at down to below -30bps was richer than the current level at around -20bps and attributed that to flatter 2s/5s back then when the expectation for continued easy policy was much stronger than now.

2s/5s swaps are around 13.5bps today and are already down from the peak of 25-30bps in early 2023. According to BNP, part of the flattening there has been driven by receiving demand for 5-year that has been in turn encouraged by the BOJ’s pooled collateral operation. However, the bank believes that such a richening move would ease from here.

On the other hand, 10-year swap spread is still much richer than 2-year and 5-year, which may reflect the positioning for YCC band widening, and may cheapen in relative terms as such positioning may subside in the near term. BNP forecast that such a development is likely to be a cheapening factor for 2s/5s10s, as the team now expects 10-year swap rate to either fall more than 5-year or rise less than 5-year. It therefore recommended short 2s/5s/10s swaps at -20bps, target at -10bps and stop out at -27bps.

New issues

• Sumitomo Reality & Development Co Ltd raised JPY30bn via selling 0.52%, April 28, 2028 bonds. Lead is Daiwa.