JPY Swaps: 10-15y bid; Long-end steeper; Long 2s/5s/7s JGBs

10-15y JPY swaps were bid and the curve steepened up from the 10y point. Barclays recommended holding on to long 2s/5s/7s flys.

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  • JGB future falls after US data and an MAS pause

  • 10-15y bid; Curve steeper from 10y

  • Hold on to 2s/5s/7s flys - Barclays


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JGB future falls after US data and an MAS pause

JGB future was mostly firmer in the morning, contrasting the selloff in the USD rates market.


In overnight trading, US treasury yields headed higher as latest US jobs and PPI data indicated that inflation in the economy may cool without crashing the economy. This prompted renewed expectations that the US Fed would turn less aggressive about further monetary policy tightening. In Asia, Singapore’s central bank surprised the market by leaving the benchmark interest rate unchanged earlier today, after missing growth expectations by a big margin in the first quarter of this year. It has become another country in Asia after Australia, India and South Korea to back off from further tightening.


The lead bond future was up by 3-ticks intraday but fell by 5-ticks in mid-afternoon domestic trading before closing the day just a tick lower at 147.67. The yield on the benchmark 10-year JGB was about half a basis point higher at 0.458%.



10-15y bid; Curve steeper from 10y

Swap trading was subdued in the morning. A dealer reported light paying from the 10-year point mostly after lunch break. The curve was little moved up to 10-year, and then steepened up in the 10- to 20-year zone.


10-year traded in a tight range around 0.645% on the day, or up about 0.5bp from the previous close. There was also paying in 15-year mostly around 1.25bps higher of 0.87%.


10s/20s swaps steepened up by 1.25bps to 38.5bps while 5s/10s was little changed at around 36bps.



Hold on to 2s/5s/7s flys - Barclays

Barclays took a look at the recent development of JGB yields in a strategy piece released on Thursday.  The bank believes expectations for higher yields could weaken another notch with a further downshift in the trading range given the dovish bias shown by the new BoJ leaders. In addition, the fundamental backdrop of economic deceleration and easing inflation and supply-demand dynamics could also encourage a decline in yields.


The team noticed that the risk-reward of keeping short positions clearly becomes less attractive if the market loses confidence in the outlook for early BoJ policy revisions. Barclays therefore believes that the risk to yields remains skewed to the downside and continue to favour a long duration bias in outright trade.


Strategies at Barclays also noted further that interest rate volatility has turned flat and if it should show a strengthened downtrend on waning expectations for BoJ policy revisions.


With these, the team expects investment demand to concentrate around the 4- 5-year zone where there are relatively large carry-rolldown effects. As such, Barclays recommend to hold on to long positions in 2s5s7s flys as a relatively value trade, assuming a further correction of the 5y sector’s cheapness.