JPY Swaps: 10-20y offers; Good 30y auction; Short 9y JGBs

Auction 01
Good 30y JGB auction has triggered more rallies in JGB future. 10-20y saw light offers and 10s/20s flattened out. DB recommended selling 9y JGBs.

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  • JGB rallies further after good 30y sale; 10-20y offers

  • DB recommends selling 9y JGBs


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JGB rallies further after good 30y sale; 10-20y offers

JGB future was firmer today, tracking similar move in the USD rates market. In overnight trading, US treasury yields fell after weaker-than-expected trade, ISM, ADP jobs data for March. The lead bond future was up by 24-ticks around mid-day after some good demand at auction.


Earlier today, the MOF sold JPY2.69902trn worth of its JPY900bn 30-year 1.4% JGBs (Number 78) at tender. The auction drew bids worth 3.19 times, up from 3.00 times last month. Average yield was 1.353%. The tail tightened from 0.19 last month to 0.10.


JGB future finally closed the day 9-ticks higher at 147.6. The yield on the benchmark 10-year JGB was half a basis point lower at 0.465%.


Trading in swaps has been mostly around the longer-end of the curve. A dealer reported receiving in 10-year at down to 0.6525% in the morning before being traded around yesterday’s close of 0.6575% after lunch break. 20-year traded in a tight range around 1.05% although it also went through a basis point lower of 1.045% before lunch break. 10s/20s swaps flattened out by 1.25bps to 38.5bps at time of writing.



DB recommends selling 9y JGBs

Deutsche Bank (DB) has noted recently that fundamental fair value for 10-year JGB yields is around 1.50-1.60%. However, the recent Shunto wage negotiations implied a lower fair value of around 1.20%, per the bank’s analysis.


JGBs are yet to reflect Japan's inflation dynamics.10-year JGBs are currently trade below their YCC ceiling of 50bps. Indeed, the whole belly of the JGB curve rallied during the banking stress, and the characteristic kink of the 10-year point was ironed out. DB therefore believes this presents an opportunity to sell because of:


  • Evidence of a sustained inflationary regime in Japan

  • Resumption of speculation regarding the tenability of YCC.


DB has a particular interest in 9-year although any point between the 5- and 10-year fits the macro rationale. It therefore recommended selling JGB #365 with a target of 60bps and a stop of 30bps.