JPY Swaps: 2nd unscheduled JGB buyback this week; Steeper 10s/20s swaps

Dive 10 Jun 2020
10y JGB yield at 0.65% triggered the 2nd unscheduled BOJ buyback this week. 10-20y swaps were bid and 10s/20s steepened to highest since January.

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  • 10y yield at above 0.65% triggers second unscheduled JGB buyback

  • 10-20y bid; 10s/20s steepest since January


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10y yield at above 0.65% triggers second unscheduled JGB buyback

Following the selloff in longer-dated US treasuries in overnight trading, 10-year JGB yield rose to above 0.65% earlier today in domestic trading, its highest level since April 2014.


As had been forecast by some players, 10-year yield at above 0.65% would trigger another BOJ intervention.


The central bank announced an unscheduled JGB buyback operation after lunch break, or the second such move this week. To tame the wild move in JGB yields, the central bank bought JPY100bn of 3- to 5-year JGBs and JPY300bn worth of 5- to 10-year JGBs.


NAB said the BOJ clearly wanted to ensure the uptrend in 10-year yield to be a gradual one, and that it was the speed that matters, not the level per se. NAB believes that under current circumstances, the fair value of 10-year JGB yield is around 0.85%.


10-year JGB yield eased off to 0.63% after the announcement. At time of writing it has already risen back to level around 0.645%, up about 2.5bps from previous close. JGB future was down by 42-ticks in the afternoon.



10-20y bid; 10s/20s steepest since January

The panic was not limited to the cash bond market. In swaps players scrambled to pay 10-year with trades up to 0.85% before the unscheduled operation news, although the majority of the flow was between 0.785% and 0.795%. These compared to previous close of 0.785%. 10-year then changed hands between 0.82% and 0.825% after the announcement and was marked around 1.5bps higher of 0.8% at time of writing.


2s/10s swaps were however 0.75bp flatter at 65.75bps, as the subsequent weakness in the yen drove some price action in 2-year which was 3bps higher intraday.


USD/JPY jumped to nearly 143.9 soon after the BOJ announcement and has been traded around 143.5-1436 afterwards.


Paying has also extended to the superlong-end. 20-year, which closed around 1.245% on Wednesday, traded mostly between 1.24% and 1.25% but there were also sporadic deals at above 1.27%.


10s/20s swaps steepened up by 0.75bp to 46.75bps, the steepest since January.