BOJ: Fixed Rate Purchase Offer

J.P.Morgan note that “although front end yields have in fact repriced significantly, we believe there is more to go. The fronts/reds curve has bounced off of its most inverted recent levels, but it remains highly inverted at nearly -75bp and the recent steepening has merely undone the effects of the late December/January rally. We believe this steep inversion remains at odds with the Fed's messaging which continue to sound caution around expectations of premature easing. There is little support for easing in Fed-speak, but markets remain steeply inverted even after the recent correction. Therefore, we see fronts/reds dis-inversion as a key source of carry and slide on the curve, as the roll-up towards spot is favourable for shorts in the Reds.”

• “One way to position for such slide, while also maximizing the ratio of slide to overall risk, is by selling the belly of a U3/M4/H5 SOFR futures butterfly (33:77 weights on the wings). This weighted butterfly spread has been fairly mean-reverting - indeed, the 6-month standard deviation of rolling 3-month changes in this spread has been about 8.4bp. But this butterfly also has very attractive slide, to the tune of 36bp over 3 months, which is over 4 times the 1-sigma move in the spread. Thus, given attractive slide relative to the risk, we recommend selling the belly of the 33:77 weighted SFRU3/M4/H5 butterfly.”

Goldman Sachs note that “over the past couple of weeks, the JPY has underperformed most other major currencies even as equities have sold-off, illustrating our empirical finding that USD/JPY typically rallies when U.S. real yields are rising, with the broader the risk backdrop taking a back seat.”

• “Thus, if markets continue to price in resilient U.S. growth and a longer Fed cycle, consistent with our own outlook, we see scope for further tactical JPY underperformance. That said, speculation around a surprise policy adjustment at Governor Kuroda’s last meeting in March has increased, despite Professor Ueda having so far suggested support for the current policy stance, including most recently at his testimony to the lower house.”
• “Such speculation (and likely continued market focus on a potential BoJ exit even if the March meeting itself disappoints as we expect) combined with elevated recession concerns should keep any JPY underperformance somewhat limited. But we have repeatedly said that U.S. real rates should matter most, and thus the current market environment looks less favourable for significant USD/JPY downside, even in the case of a hawkish BoJ policy shift.”

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