JGBS AUCTION: Mixed Demand Metrics For 10Y Auction

The 10-year JGB auction delivered very poor results, with the low price falling well short expectations at 98.26, according to the Bloomberg dealer poll. Moreover, the cover ratio declined to 2.6566x, the weakest since October 2021, from 3.1809x in the previous auction and the tail lengthened dramatically to 0.21 from 0.03.

• This performance came despite the auction offering an outright yield 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.
• In early afternoon Tokyo trading, the cash 10-year JGB is 2bps cheaper from pre-auction levels, while JGB futures have gapped cheaper to session lows. 

The Japanese Ministry of Finance (MoF) sells Y 1,982.8bn 10-Year JGBs:

• Average Yield: 1.404% (prev. 1.260%)
• Average Price: 98.24 (prev. 99.47)
• High Yield: 1.429% (prev. 1.263%)
• Low price: 98.03 (prev. 99.44)
• % Allotted At High Yield: 18.3344% (prev. 37.1592%)
• Bid/Cover:  2.6566x (prev. 3.1809x)

USD/CNH has moved comfortably off earlier highs (7.3068). The last near 7.2840. This puts us close to both the 20 and 50-day EMA support points. Further south is the 100-day EMA (near 7.2620).

• The little change in the USD/CNY fixing continues to limit USD/CNH upside. The weaker US-CH yield differential backdrop may also be aiding lower levels in the pair.
• Remarks by President Trump that a weaker CNY policy (he made similar allegations against Japan) could see tariff penalties, may also be in play. This reflects a stronger yuan as being seen as reducing trade tensions, all else equal. However, the sides still appear reasonably apart at this stage on any type of trade deal.
• Earlier remarks from the MOFCOM also didn't suggest any significant retaliatory measures from China to the US's latest step. Our policy team posted: "China will take countermeasures to safeguard its interests and hopes the U.S. can return to the right track of properly resolving differences via dialogue as soon as possible, said the spokesperson for the Ministry of Commerce, following the U.S. imposing an additional 10% tariff on Chinese goods starting Mar 4."
• Still, some of the sell-side bias remains for higher USD/CNH levels in response to tariffs. Nomura stating 7.4600 is an upside target for the pair (per BBG), based off China's response during the 2018-2019 trade conflict period.