JPY Swaps: Early 10y bid; SL given after Ueda; Basis idea

Japanese Yen
Early losses in JGB future saw paying in 10y, but dovish Ueda then prompted SL offers. BNPP has identified an opportunity in the basis market.

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  • Early 10y bid; SL offers after Ueda

  • Pay 6m6m Vs 5y basis - BNPP


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Early 10y bid; SL offers after Ueda

JGB future opened weaker as it tracked the selloff in the USD rates market in overnight trading. It then erased all the losses in mid-morning domestic trading as the market prepared for more dovish comments from Ueda.


Ueda said in Parliament today that the BOJ’s JGB buyback was to help achieve the 2% inflation target rather than financing government spending. This has boosted confidence in the JPY rates market as the central bank may not back off from the JGB buyback program in the near future.


The lead bond future was up by 11-ticks intraday before being marked 8-ticks higher at 147.43 in mid-afternoon domestic trading. The yield on the benchmark 10-year JGB was more than half a basis point lower at 0.472%.


Dovish Ueda has prompted receiving at the superlong-end of the curve. 20-year, for example, was offered down briefly by 4bps to 1.03%. Early losses in JGB future, however, saw paying in 10-year at up to 2bps higher of near 0.7%, although it started off the day with mostly 2-way interest.



Pay 6m6m Vs 5y basis - BNPP

BNPP took a look at the cross-currency market in a research piece released yesterday. The team noted that the cross-currency basis spread’s retracement has stalled recently, having retraced from their sharp widening (negative move) in March due to stress in the financial sector.


BNP believes that the widening of 5-year basis in March was a reflection of expectations of a Fed rate cut, with an element of financial stress too. The team now thinks that 5y basis may wait to re-tighten until the market further prices out a Fed rate cut. At the same time, for 3m, strong demand for JGB T-bills from domestic investors is likely crowding out the USD supply channel from overseas investors.


The team argued that the BOJ needed to reduce Rinban significantly so domestic investors can switch their holdings from T-bills to JGBs, and that the BOJ is aware that it is their critical task to do so. BNPP believes that the BOJ’s Rinban reduction is more certain than the future market changing its FF rate expectation. As such, there will be tightening of short-dated basis before 5-year, and paying 6m6m vs 5-year will likely capture this opportunity.