JGBS AUCTION: 30Y Supply Absorbed With Mixed Demand Metrics

The 10-year JGB auction delivered mixed results, with the low price beating expectations at 99.42, according to the Bloomberg dealer poll. However, the cover ratio declined to 3.1809x from 3.3570x in the previous auction and the tail lengthened slightly to 0.03 from 0.01.

• This performance came with the auction offering an outright yield at a fresh cyclical peak of 1.26%, 10-15bps higher than last month. Additionally, the yield curve between 2- and 10-year bonds was slightly steeper compared to the prior month.
• Improving sentiment toward global long-end bonds and slightly less aggressive expectations of further near-term tightening by the BoJ didn’t appear to support demand significantly.
• In early afternoon Tokyo trading, the cash 10-year JGB is little changed from pre-auction levels, while JGB futures have gapped cheaper to session lows. 

The Japanese Ministry of Finance (MoF) sells Y 1,963.2bn 10-Year JGBs:

• Average Yield: 1.260% (prev. 1.140%)
• Average Price: 99.47 (prev. 100.53)
• High Yield: 1.263% (prev. 1.141%)
• Low price: 99.44 (prev. 100.52)
• % Allotted At High Yield: 37.1592% (prev. 91.7315%)
• Bid/Cover: 3.1809x (prev. 3.3570x)

The market has over a 90% chance of a rate cut at the RBA’s February 18 meeting and between three and four cuts by December, whereas in November this was closer to two. When we update our simple policy reaction function for Q4 CPI & OCR and Q3 GDP data, it continues to imply that rates need to be a bit higher to be in line with economic fundamentals using the RBA’s November projections but the end-2025 rate is 10bp lower than our November estimate.

• Our OCR calculations are 10bp lower than the November run across the horizon to Q2 2026 but the model still has 25bp of cumulative tightening over the four quarters to Q1 2026.
• The model includes the gap between the trimmed mean and the mid-point of the RBA’s target band. Since in November the RBA didn’t expect underlying inflation to reach 2.5% until end-2026, the equation doesn’t signal any monetary easing. It is forward looking including the inflation gap one quarter ahead.
• The contemporaneous output gap is also in the equation but doesn’t go negative enough to offset the positive inflation gap.
• We will update it again with the RBA’s new forecast set published with the February decision.
• It is worth noting that econometric analysis is just an estimate and not a forecast. 

Australia RBA policy reaction function with trimmed mean