JGBS: Yield Curve Under Flattening Presure
After reaching a record steepness in mid-January, the 2/40 yield curve is now testing the lower bound of the well-defined range that has contained price action since mid-year.
- Since late last year, steepening has been most pronounced in the 2/5 segment, leaving the 5-year sector relatively unattractive on the curve. Into the recent election, expectations of fiscal expansion under a Takaichi administration implied heavier debt supply, reinforcing pressure on intermediates.
- In recent days, however, those fiscal concerns appear to have moderated following Prime Minister Sanae Takaichi’s historic election victory.
- Notably, while the 2/5 segment has flattened, it is the 5/40 curve which has broken through the bottom of the range it has traded in since June last year.
- This likely reflects two dynamics. First, renewed yen weakness could bring forward expectations of additional BOJ rate hikes, placing upward pressure on 5-year yields relative to the long end. Second, the 5-year sector has emerged — and is likely to remain — a preferred short among more tactical accounts. In particular, positioning in 5s30s flatteners appears to have scope to extend as the BOJ edges closer to another tightening step.
Bloomberg Finance LP
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EUR: EUR/USD - 1.1700 Caps Move, Looks Like We Tread Water For Now
The overnight range was 1.1663 - 1.1699, Asia is currently trading around {EURUSD Curncy}. The pair found sellers again back toward 1.1700 capping the knee-jerk reaction to the Fed news. We are firmly back in the wider 1.1450-1.1850 range which dominated the last 6 months of the year and we need a catalyst to get a break and some sort of a trend going again. On the day it looks likely we tread water within a narrower 1.1600-1.1725 range as the market looks for a trigger to regain some momentum.
- The EUR/USD Average True Range for the last 10 Trading days: 43 Points
Fig 1 : EUR/USD Spot Daily Chart
Source: MNI - Market News/Bloomberg Finance L.P
USD: BBDXY - Looks Directionless Within 1205-1215 For Now
The BBDXY range overnight was 1207.54 - 1210.11, Asia is currently trading around {BBDXY Index}. The USD found some support around the 1208 area after the initial knee-jerk lower. This leaves the USD in the middle of its recent range without any clear direction. On the day, it looks like 1205-1215 should cover it for now, watch for any ruling from the Supreme court as well as a potential incursion into Iran to maybe shake it up a little. This lack of a trend is being reflected in the CFTC data which shows very little positioning in the USD Index to start the year.
- MNI INTERVIEW: Fed Could Cut Around 100BP This Year-Bell. The Federal Reserve has ample room to keep cutting interest rates despite a robust economic backdrop because inflation excluding factors like shelter is already near target and the job market is effectively stalled, former IMF economist Gerwin Bell told MNI. {NSN T8R4IB6QRTHC <GO>}
- The BBDXY Average True Range for the last 10 Trading days: 339 Points
Fig 1: BBDXY Daily Chart
Source: MNI - Market News/Bloomberg Finance L.P
AUSSIE BONDS: AU-NZ10Y Diff Hovering Just Below Highs
The AU–NZ 10-year yield differential currently sits at +29bps, around 10bps below its recent peak of approximately +40bps, the widest since October 2020.
- The widening in the long-end spread has been mirrored by shifts in market expectations for the policy rate differential over the next year, as reflected in the AU–NZ 1-year forward 3-month swap (1Y3M) spread.
- Markets are presently pricing a 10-15bp narrowing of the AU–NZ 3-month rate spread over the next 12 months.
- Our Economics team’s central view is that both the RBA and the RBNZ are most likely to leave policy rates unchanged over the coming year.
- A simple regression analysis of the AU-NZ 10-year yield differential against the AU-NZ 1Y3M spread over the past two years shows that the 10-year differential is around 2bps above fair value based on the regression model.
Figure 1: AU-NZ: 10-Year Yield Differential Vs. FV
Source: Bloomberg Finance LP / MNI
