Goldman Sachs on JGBs - FJElite

JGB market finally saw some support this week following Finance Minister Katayama’s remarks today that the government “intends to pursue policies to encourage households and pension funds including the GPIF to increase their investment in Japanese financial assets”, which triggered a reversal rally as 5y+ JGBs richened 5- 11.5bps across the curve supported by both international and domestic investors. 5s40s JGB curve eventually steepened 4.5bps across the week to close at 199.5bps. We see the sharp rally in JGBs today as an overreaction to Katayama's comments, in which she used the broad term “Japanese financial assets” and did not explicitly commit the GPIF to purchasing government bonds in size. Looking ahead, even with the significant reversal today and recent revisions in the Honebuto (Basic Policy) draft, we maintain a bearish bias towards backend JGBs ahead of the 20y and 40y issuance schedule, while 5y at around 2% could continue to attract dip buying interest. In swaps, franchise saw a pickup in front end paying interest this week following hawkish undertones in the Basic Policy draft revision and Sakura Report released, with Dec BOJ now pricing in 122.1 bps/97.2% (vs 91% last Friday) and Jan now at 129.15bps/125.4% (vs 115% last Friday).