JGBS: 40-Year JGB Auction Results

At the Tokyo lunch break, JGB futures are sharply stronger, +56 compared to the settlement levels, but slightly off the session’s best level.

• Outside of the previously outlined services PPI, there hasn't been much by way of domestic drivers to flag.
• Later today, department store sales print, along with machine tool orders (both for Jan). There is also an Auction for Enhanced-Liquidity 15.5-39-year.
• “Joyo Bank Ltd. is holding off from investing in domestic bonds for now, despite being one of Japan's largest regional lenders. The bank's managing executive officer, Yoshitsugu Toba, expects the Bank of Japan to lift interest rates once more in July, but sees a risk that debt yields will climb further if the BOJ raises rates to around 1.5% in about three years.” (per BBG)
• Cash US tsys are ~3bps richer in today’s Asia-Pac session after yesterday’s modest gains.
• Beyond the 1-year, cash JGBs are 1-6bps richer across benchmarks, with the 7-year leading. The benchmark 10-year yield is 4.3bps lower at 1.387% versus the cycle high of 1.466%, set last week.
• Swap rates are 1-3bps lower. Swap spreads are generally wider.

The AU-US 10-year cash yield differential currently stands at +2bps, positioned in the middle of the ±30bps range that has largely held since November 2022.

• However, a simple regression of the 10-year yield differential against the AU-US 1-year forward 3-month swap rate (1Y3M) differential over the past year suggests the current spread is about 11bps above fair value, estimated at -9bps.
• The 1Y3M differential, a key gauge of expected relative policy trajectories over the next 12 months, has traded within a 15-20bps range this year and is currently at the upper end of that range.
• In early February, the 1Y3M differential had declined approximately 90bps since mid-September, falling from +55bps to -35bps. 

Figure 1: AU-US Cash 10-Year Yield Differential (%)

Source: MNI – Market News / Bloomberg

• China held prime rates steady at 2.00% for the 1-Year Medium Term Lending facility.
• The PBOC conducted CNY300bn of 1-year medium term lending
• Maturities CNY200bn.
• Outstanding under the Medium Term Lending Facility at CNY4.09tn with a further CNY500bn to mature in February.