Lower FY17 JGB Issuance to Intensify JGB Liquidity Concerns Amid BoJ’s Sustained Purchases

22 December 2016

Rates & FX Market Update

Lower FY17 JGB Issuance to Intensify JGB Liquidity Concerns Amid BoJ’s Sustained Purchases

Highlights

¨   Global Markets: USTs clawed back prior day’s losses amid softer oil prices, with yields declining by 2-3bps; the stronger existing home sales however, failed to buoy the USD strengthening momentum where investors are likely turn to the heavy US economic calendar later in the day, with strong revisions on 3Q GDP and robust jobs data likely to mitigate profit taking inclination on the USD going into the festive holidays; keep a neutral USD view. Meanwhile, Japan’s Finance Ministry has announced its plans to reduce JGB issuance in FY17 from JPY147.0trn to JPY141.2trn given lower refinancing and funding needs; reduction in JGB issuances will be seen across the curve, with the exception of 30y and 40y. With BoJ holding 37.9% of JGBs as at September 2016, lingering concerns on JGB liquidity are likely to intensify early next year which could limit upward momentum on the USDJPY pair; remain cautious on heavy JPY short positionings.

¨   AxJ Markets: BoT’s decision to stand pat yesterday was unanimous, underpinned by the steady economic recovery and modestly rising inflationary pressures. BoT projects for headline CPI to drift higher into the 2.5±1.5% target band by 1Q17 but cited increasing concerns stemming from external downside risk where we see the likelihood for BoT to reduce rates by another 25bps. ThaiGB curve bull steepened yesterday, with yields on 2y ThaiGB remaining sticky at the 1.60% handle over the past weeks; PDMO’s issuance skew is likely to continue anchoring short to belly tenors, supporting our mild underweight duration call. Elsewhere, MGS remained stable overnight even as Malaysia’s CPI edged higher to 1.8% y-o-y (Oct: 1.4%), attributed to strong increases in food prices, which could continue to dampen prospects of further BNM easing; stay neutral MGS.

¨   AUD delved lower to its 6-month low of 0.7231/USD, weighed by the softening commodity prices yesterday. CNY movements and China’s economic growth outlook remains a key catalyst behind movements on the AUD over the medium term. Expect domestic financial stability concerns and a challenging housing market to continue constraining RBA’s easing prospects; keep a neutral stance on AUD over the medium term.