INDONESIA: Highlights From Local News Wires

The Japanese Ministry of Finance (MOF) will today sell Y700bn of 40-Year JGBs, re-opening JB#16. The MOF last sold 40-year debt on 25 May 2023, the auction drew cover of 2.377x at a high yield of 1.385%, a low price of 97.40, with 53.9393% of bids allotted at the high yield.

• At the late May auction, 40-year supply was successfully absorbed by the market, with the high yield coming in below dealer expectations. However, the cover ratio declined to 2.377x, its lowest level since Nov’22 as the flattening and richening of the yield curve appeared to reduce demand relative to the late March auction.
• Today’s supply follows the lacklustre demand seen at the 30-year JGB auction in early July. At the time, the allure of a new issue and an opportunity to extend portfolio duration were more than offset by a lower outright yield and a slightly flatter yield curve. In contrast, the 20-year supply in mid-July saw a stronger bid, supported by a higher outright yield and a steeper yield curve.
• The current 40-year auction takes place with the outright yield at a similar level to the previous outing in late May despite a period of significant volatility since the last outing. In late June, the 40-year yield had reached a new cycle low but rose in early July due to speculation about a possible YCC adjustment by the BoJ during this week's policy meeting. Later, the yield returned to its current level as sources close to the BoJ suggested that the board was leaning towards maintaining the existing approach in the upcoming policy meeting.
• The yield curve is also at a similar level to the late May auction. It is also important to note the steepness of the curve from a longer-term perspective.
• While today's auction occurs ahead of the BoJ's policy decision on Friday, potentially leading to lower demand, the supply is expected to be adequately absorbed. This is due to the underlying trend of local participants shifting their portfolios from hedged offshore debt to Yen bond holdings.
• Results are due at 0435 BST/1235 JST.

At the Tokyo lunch break, JGB futures are holding a downtick, -3 compared to the settlement levels.

• There hasn’t been much in the way of domestic drivers to flag.
• According to Bloomberg, JGB futures are going into this week’s BOJ decision with the same game plan they had for Kazuo Ueda’s first two meetings as governor. That said, time is running out on this type of strategy with the BOJ considering a sharp increase to its inflation forecast for this fiscal year. This means the central bank is unlikely to sound dovish enough to satisfy bond bulls. That will be the clarion call for medium-term bears who have been waiting for a major JGBs selloff to begin. (See link)
• The Japan breakeven inflation rate for the 10-year CPI-linked bonds rose 2bp to 1.191%, an 8-year high, on Tuesday, according to Bloomberg.
• Cash JGBs are dealing mixed at the Tokyo lunch break with yield changes bounded by -1.2bp (40-year) and +0.5bp (futures-linked 7-year). The benchmark 10-year yield is 0.1bp higher at 0.464%, below BoJ's YCC limit of 0.50%.
• The 40-year zone is outperforming, showing no concession on the curve, with its yield at 1.474% ahead of today’s supply.
• The swaps curve twist steepens, pivoting at the 3-year, with rates 0.3bp lower to 2.0bp higher. Swap spreads are wider across the curve.