JGBS: Twist-Flattener With Mkt Convinced A Hike Is Coming Next Week

After rising around 1.5% on Tuesday, crude is slightly lower on Wednesday as the market waits for key information released later. WTI is down 0.3% to $60.84, holding above $60 through the session, while Brent is 0.3% lower at $64.99 after falling to $64.90. The USD index is up 0.1%.

• The excess oil supply driven by increased OPEC and non-OPEC output remains in focus with the spread between the WTI December-January contracts only 4c, suggesting an expected easier market. The EIA short-term outlook, IEA annual report and OPEC monthly report are published Wednesday. As well as US industry-reported inventory data.
• While expected excess supply has pressured oil prices, the market remains unsure over the impact of the latest sanctions on Russia. There has already been an increase in diesel prices and signs that India is looking for sources that are not Lukoil or Rosneft. Also, Russia’s Lukoil’s West Qurna 2 field in Iraq has been transferred to state firms to ensure production continues, according to Bloomberg.
• Our US analysts believe that the post-shutdown data schedule should be published next week with a risk that October CPI won’t be released. See their FAQ here.
• Later the Fed’s Barr, Williams, Paulson, Waller, Bostic, Miran and Collins speak as well as the ECB’s Schnabel and de Guindos. The Eurogroup meeting is taking place. There are no data of note.

JGB futures are stronger and at session highs, +14 compared to settlement levels, on a data-light day.

• Cash US tsys are 2-4bps richer in today's Asia-Pac session after being closed yesterday for Veterans Day.
• Cash JGBs are 1.5bps richer (7-year) to 1.5bps cheaper (20- and 40-year) across benchmarks. The benchmark 5-year yield is 0.9bp at 1.243% versus the cycle high of 1.272% (see chart).
• Ahead of tomorrow's 5-year supply, the 2s/5s curve has steepened to near its cycle high of 32bps, last reached in late 2023.
• Regression analysis shows a strong pro-cyclical, but atypical, relationship between the 5-year yield and the 2s/5s curve over the past 12 months.
• This dynamic is supported by expectations that the 5-year sector will sit in the "sweet spot" for increased issuance, as Prime Minister Sanae Takaichi looks to deploy her first stimulus package to jump-start the economy.
• Swap rates are 1bp lower to 1bp higher, with a steepening bias.
• Tomorrow, the local calendar will see PPI and International Investment Flow data alongside 5-year supply.

Source: Bloomberg Finance LP

US treasury futures were mostly lower along with bond yields in a disjointed, post holiday market.  The 10-Yr bond future TYZ5 is down -03 at 112-30, in touch with the 20-day EMA.  A break lower could bring the 50-day EMA of 112-26+ into focus.  

Cash's morning rally moderated somewhat in the afternoon, but remains a very strong day with bond yields lower across the curve.  

• The 2-Yr is at 3.56% (-3.3bps)
• The 5-Yr is at 3.673% (-4.2bps)
• The 10-yr is at 4.083% (-3.5bps)
• The 30-Yr is at 4.683% (-2.3bps)

FED speakers dominate tonight with Williams, Paulson, Waller, Bostic, Miran and Collins all speaking throughout Wednesday, whilst economic data remains on hold.  

Investors will focus on the US$42bn 10-Yr issuance as the next guide for market demand, with markets remaining fixated on the US shutdown outcome.