Halister News

(Bloomberg) -- Foreign investors are getting short in the long-end of the yen curve, setting up for Prime Minister Abe’s ruling LDP to face potential losses at the election which would raise doubts about BOJ Governor Kuroda’s future. Election Scenarios

• Strategists narrow down three scenarios for the election: LDP suffers only minor losses, retains a majority but loses many seats, or loses the majority altogether
  • Under the latter two scenarios, the JGB curve should steepen in the long-end (10y+) as markets price some concern that monetary easing will be dialed back after Kuroda’s term ends, writes Deutsche Bank’s chief strategist Makoto Yamashita in a client note
  • In the event Abe’s LDP maintains majority, JGB yields should either hold steady or decline slightly: Deutsche Bank
• In the event of heavy LDP losses, the initial market reaction may be tempered by risk- off moves which could see some bull flattening in JGBs, a Shinichiro Kadota, senior FX & yen-rates strategist at Barclays Securities Japan Ltd., writes in a note
  • However, over the medium term, more expansionary economic policies could bear-steepen the JGB curve, he adds

Positioning

• Recent JPY curve steepening due to widening of JSCC/LCH basis has suggested heavy long-end paying from foreign investors to set-up for the election, which points to positioning for a slip in power from Abe’s party
• While foreign investors appear to have set-up with significant paid positions in the long-end, domestic players appear to have remained comparatively calm, and have yet to make any "sizable bets" on the election outcome, according to Koichi Sugisaki, a strategist with Morgan Stanley MUFG Securities Co.
  • As the large paid positions may be reduced after the election, and given the potential for a risk-off bull flattening if Abe experiences heavy losses, Morgan Stanley recommends entering bullish risk reversal strategy in the long- end of curve
  • Recent payer buying in the long-end, has enriched payer skew; recommend buying 1m20y receiver at 0.6975% vs selling 1m20y payer at 0.800% at zero cost

To contact the reporter on this story: Stephen Spratt in London at sspratt3@bloomberg.net To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net Patricia Lui