JGBS: Futures Weaker Overnight After US CPI, Light Local Calendar

Natural gas rose over 3% on Friday following Israel’s attack on Iranian nuclear sites. Over the weekend the situation escalated with Israel targeting Iran’s oil and gas infrastructure, which will be lengthy to repair and rebuild.

• Israel struck Iran’s Fajr Jam Gas Refinery and South Pars gas field, which is one of the largest in the world and platform output has been temporarily stopped, according to The Australian. Iran has the second largest natural gas reserves and produces around 6% of global output but is not a major LNG exporter.
• The risk is that it retaliates by closing the Strait of Hormuz which 20% of global seaborne LNG transits through including from Qatar, the third largest exporter in 2024. Rabobank said that a disruption on this scale could push gas prices to EUR 100. Europe has become less reliant on Qatari LNG due to the risks of shipping through the Red Sea.
• US gas rose 3.4% to $3.61 on Friday to be up almost 5% this month. It fell to $3.50 before rallying to $3.67. It is currently up 2.5% to $3.67 in today’s session. Temperatures are forecast to be above average next week. US lower-48 output rose 3.2% y/y on Friday while demand fell 5.2% y/y.
• European prices rose 3.8% to EUR 37.57 but off the intraday high of EUR 38.58. It is now up almost 10% in June and the risks to global supplies from the Israel/Iran conflict is likely to push them higher as European refilling has a long way to go ahead of the coming winter.
• Bloomberg reported that the European Commission will on Tuesday propose a plan to end the EU’s reliance on Russian gas by end 2027. It would be gradual starting in January 2026 and would also include a ban on services to Russian companies at EU LNG terminals.

In post-Tokyo trade, JGB futures closed weaker, -32 compared to settlement levels, after US tsys finished last week on a weak note despite evidence that the conflict between Israel and Iran is escalating.

• (MNI) Israeli officials estimate fighting with Iran, "could stretch for two to three weeks, with more strikes on tap." Ynet notes that Israeli Prime Minister Benjamin Netanyahu, "is expected to speak on Friday with U.S. President Donald Trump
• In early Monday trade, the knee-jerk reaction in major asset classes has been risk-off (ex-weaker yen), with a focus on oil prices. For the oil benchmarks, we sit off session highs. That said, both benchmarks are still up over 2%, as Israel started targeting Iran's energy facilities. US tsy futures are little changed.
• The BoJ is expected to keep its policy rate unchanged at 0.50% at its June 16–17 meeting, with focus turning to whether it will slow the pace of its JGB purchase reductions. The BoJ is likely to outline its bond-buying schedule through Q1 2027 to provide more transparency while maintaining flexibility. Markets see little risk of a rate hike at this meeting, with a projected policy rate of 0.60% by December.
• The local calendar will be empty today, ahead of the BoJ Policy Decision on Tuesday. 

ACGBs (YM -3.0 & XM -7.5) are weaker with a steeper curve after US tsys finished Friday, cheaper despite evidence that the conflict between Israel and Iran is escalating.

• Israel struck over 200 targets in Iran, including nuclear facilities, killing several military commanders. 
• In early Monday trade, the knee-jerk reaction in major asset classes has been risk-off (ex-weaker yen), with a focus on oil prices. US tsy futures are little changed.
• The latest UofM sentiment came out higher than expected on Friday, 1Y inflation much lower than expected (5-10Y in-line).
• Aside from geopolitical risks, markets await the FOMC policy announcement on Wednesday.
• Cash ACGBs are 4-6bps cheaper with the AU-US 10-year yield differential
• The bills strip has cheapened, with pricing -2 to -6.
• RBA-dated OIS pricing is firmer across meetings today. A 25bp rate cut in July is given an 83% probability, with a cumulative 78bps of easing priced by year-end.
• Today, the local calendar will be empty.
• The AOFM plans to sell A$300mn of the 4.75% 21 June 2054 bond on Tuesday, A$900mn of the 2.75% 21 June 2035 bond on Wednesday and A$800mn of the 1.00% 21 December 2030 bond on Friday.