GOLD: Gold Holding Onto Losses, Remains Overbought

• Bond Futures are lower in China today, wiping out the gains from yesterday.
• The 10-Yr is lower by -0.21 at 107.73 after yesterday's gains of +0.19.  The 10-Yr remains below all major moving averages.
• The 2-Yr is lower by -0.04 at 102.35 to push further below all major moving averages.  The 20-day EMA above is at 102.39.
• At 1.80%, the 10-YR CGB is at the top end of the 1.70-1.80% range it has traded in since early August.  

Earlier headlines crossed from Japan LDP leadership candidates. Notably from Takaichi we got, via Rtrs, :"JAPANESE PM CONTENDER TAKAICHI: WILL USE TAX REVENUES TO FUND TAX CUT, SPENDING FOR STEPS TO COMBAT RISING PRICES BUT IF NECESSARY, SHOULD ISSUE BONDS. 

• This fits with Takaichi's known fiscal expansion viewpoint. Still, she sits well down per Polymarket odds, last around 28, off recent highs.
• Koizumi continues to lead, last at highs of 70 (since the LDP election was called a few weeks ago), see the chart below (Koizumi odds are the white line, Takaichi the orange line). Still, Takaichi remains the top pick among onshore opinions.
• Koizumi noted earlier:  KOIZUMI: MUST BE MINDFUL OF NEED FOR FISCAL DISCIPLINE, BUT ACHIEVING SOLID ECONOMIC GROWTH IS BASIS FOR GUIDING SOUND FISCAL POLICY - [RTRS]"
• His remarks are more in line with a status quo fiscal outcome, although changes can't be ruled out.
• The JGBs 2/30s curve has flattened of late, last +225bps, we were around +245bps in early September. Nevertheless, the 2/30 curve remains near its steepest since 2005.
• The LDP election is scheduled for Oct 4. 

Fig 1: Koizumi Clear Front Runner For LDP Leadership Race - Per Polymarket 

Source: Polymarket/Bloomberg Finance L.P./MNI 

Cash ACGBs are 2bps cheaper today. 

• The AU-US 10-year yield differential is currently around +12bps, placing it in the top half of the ±30bps range that has persisted since November 2022.
• 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 two years suggests that the current spread is close to fair value.
• The 1Y3M differential, a key measure of expected relative policy paths over the next 12 months, has increased by approximately 60bps since June, reaching a level similar to October 2024.

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

Source: Bloomberg Finance LP / MNI