July 29: Fed Hold, Curve Steepens

Research evidence excerpt

July 29: Fed Hold, Curve Steepens

UpdateMyields.

• Following the Kumamoto earthquake on Tuesday evening, the short- to

medium- term sectors rallied as the market pared back expectations for

the pace of BoJ rate hikes through the Tokyo session. The super-long

sector initially traded cheaper in a twist-steepening move on expectations of

additional fiscal expansion related to earthquake relief measures. However,

the weakness in the super-long sector quickly reversed, and steepening

pressure eased ahead of the BoJ’s JGB purchase operations in the 3-5y and

25y+ sectors. On the BoJ operation, 3-5y sectors showed a solid demand,

while the 25y+ operation produced a 0.9bp tail. Shortly after midday,

headlines emerged that GPIF had added domestic bond active funds

beginning in FY2025. While this development is not particularly related to

changes in asset allocation, the market might have interpreted the news

positively in addition to less selling demand in super-long sector. As a result,

the super-long sector flattened into the close. Ultimately, JGB curve bull-

flattened; the 2y JGB rallied by 2.0bp to 1.47%, 10y JGB rallied off by 3.0bp to

2.745%, and 30y JGB rallied by 5.0bp to 3.93% on a simple yield basis. TONA-

OIS curve also bull-flattened and outperformed JGBs in sub-10y sectors.

• EGBs reversed its course from the last two days and sold off sharply

through the London session, led by the belly with the German 5y closing

7bp higher. The cheapening started already in the morning session after

overnight news of renewed attacks of Iran on Jordan reached the market,

and intensified in the afternoon session as brent went back up to $90/bbl.

Longer dated cash curves flattened, led by the 10s30s which flattened ~2bp.

EGB spreads to Germany widened, led by 10y BTP/Bund with ~3bp.