Halister News

(Bloomberg) -- Recent twist-steepening in the JPY swap curve has pushed it toward its USD equivalent ahead of tomorrow’s BOJ rate decision, Bloomberg strategist Tanvir Sandhu writes (see chart).

• USD-JPY 2s30s swap curve spread currently at 21bps; spread may narrow initially should the BOJ meet increased expectations for an IOER cut and long-end steepening in JGB curve at the same time
  • JGB curve has steepened in the past week amid expectations for a reverse “Operation Twist” by BOJ
  • May see global bull flattening if BOJ keeps policy unchanged; meanwhile, bear-steepening likely to continue if BOJ opts only to reduce the maturity of long-end bond purchases
• Any further JPY swap curve steepening may be limited by domestic Japanese investors finding the steeper curve attractive and scaling into flatteners
  • This would also make a consistently steeper JPY curve vs USD curve unsustainable
• Japan’s 10-year zero-coupon inflation swap trades below levels seen just before BOJ unexpectedly adopted negative rates on Jan. 29 (see chart)
  • Ultimately, any reassurance by global central banks that monetary stimulus will be maintained until inflation targets are reached would likely contain rate volatility

• NOTE: Tanvir Sandhu is an interest-rate and derivatives strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.