JPY Swaps: Hawkish Ueda triggers panic 10y bid and stronger yen

Chart line down Oct 2022
BOJ Governor Ueda said ending negative interest rate was an option, triggering panic paying in 10y JPY swaps and a stronger yen.

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  • 10y JGB yield hits 0.7% on hawkish Ueda

  • Panic 10y bid flattens 10s/30s

  • Yen’s depreciation to back bear-steepening


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10y JGB yield hits 0.7% on hawkish Ueda

JGB future slumped today, underperforming the move in the USD rates market on Friday. The drastic move was driven by comments from BOJ Governor Ueda.


Ueda said in an interview with the Yomiuri newspaper that the central bank has become more confident that prices and wages would keep their uptrend sustainably. Among the options available, ending its negative interest rate is one of the choices.


Some market participants said Ueda’s hawkish comments was intended as a verbal FX intervention. Indeed, USD/JPY fell sharply from levels above 147.45 in previous close to below 146.4 intraday in Tokyo.


The hawkish comments also triggered a massive selloff in JPY rates with the bond future down 74-ticks after lunch break before being marked 64-ticks lower at 145.6 at time of writing. The yield on the benchmark 10-year JGB rose to 0.7% in earlier trading, or the highest level since 2014. The yield eased off to around 0.695% after the BOJ offered to conduct 5-year fund-supply operation on September 14 to curb the sharp rise in 10-year JGB yield.



Panic 10y bid flattens 10s/30s

Swappers scrambled to pay 10-year since market open following Ueda’s hawkish comments. A dealer reported trades at up o near 0.9% in the morning session before easing to trade around 0.875% near lunch break. These compare to previous close of 0.82%.


Further up the curve, 30-year traded up to 1.495% intraday before being marked 5bps higher of its fresh high of 1.475% at time of writing.


10s/30s swaps were nevertheless 0.75bp flatter at 60bps as 10-year has been slightly underperforming on the selloff. 2s/10s swaps, on the other hand, flattened out a tad as price action in 2-year saw swap rate there up by more than 5.5bps at time of writing.



Yen’s depreciation to back bear-steepening

Barclays said in a research piece released on Friday that USD/JPY was once again pushing levels associated with FX intervention – which is currently around 150. The bank believes that any official action could cause 2-4% worth of yen appreciation in the near-term but sustained currency strength would need radical shifts in the external environment.


Barclays also noted in the piece that funding for an official intervention would be from selling of foreign bonds.


JPY depreciation could put the central bank under political pressure to scale back its JGB buyback in the short-term, although the BOJ would realistically reduce its JGB purchase at a pace needed to avoid a net increase in its holdings in 2024 anyway. This has prompted Barclays to expect bear-steepening of the JPY rates curve.