Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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USDJPY trade idea
Junvum Kim
Sales Trader
Summary: Monetary policy divergence between US and JP remains sufficiently wide giving attractive carry trade while recent developments from BOJ with weak policy tweak with treasury bonds seem to face headwinds post US credit downgrade.
Key events that moved USDJPY
- It has been a week since BOJ tweaked the YCC – enhancing the sustainability of monetary easing – allowing greater flexibility with 10 year JGB yields capped to 1%.
- BOJ announced two unscheduled debt-purchase operations as 10 year JGB hits 0.65%, nine year high.
- Fitch’s US credit downgrade two days ago joining S&P that had already downgraded back in 2011.
- Size of quarterly bond sales from US Treasury was raised for the first time in two and a half years for financing a rise in budget deficits potentially further exacerbating yield to stay bid.
- *BOJ'S UCHIDA: BOJ TO LIMIT EXCESSIVE RISE IN YIELDS
- Ackman short long end (30y) vs Buffet long short end (3m or 6m) indicating steepening of the yield curve and in fact 5y30y already in positive territory unlike 3m10y and 2y10y that are deeply inverted at -120bps and -70bps respectively.
- Real yields AKA TIPS yield ascending with 30y to nearly 2%, highest since 2011 and 10y to 1.8%
- Price action of USDJPY & US 10 year yield (nominal) show 0.5 correlation based on weekly data over 2 years.
1 year yield 5.63 beats 3m treasury bills and 98% of S&P500’s high dividend stocks but behind high yield corporate yield (HYG) 8.4%.
Forward Curve | Dates | Points Bid/Ask | Forwards Bid/Ask | Yield | ||
ON | 08/07/2023 | (7.03) | (6.17) | 142.71 | 142.72 | 0.05% |
TN | 08/08/2023 | (2.28) | (2.18) | 142.65 | 142.65 | 0.02% |
SP | 08/08/2023 | 142.63 | 142.63 | 142.63 | 142.63 | -1.00% |
SN | 08/09/2023 | (2.29) | (2.16) | 142.61 | 142.61 | 0.02% |
1W | 08/15/2023 | (15.62) | (15.30) | 142.47 | 142.48 | 0.11% |
2W | 08/22/2023 | (31.24) | (30.63) | 142.32 | 142.32 | 0.22% |
3W | 08/29/2023 | (46.67) | (46.19) | 142.16 | 142.17 | 0.33% |
1M | 09/08/2023 | (68.92) | (68.46) | 141.94 | 141.95 | 0.48% |
2M | 10/10/2023 | (141.11) | (140.20) | 141.22 | 141.23 | 0.99% |
3M | 11/08/2023 | (205.92) | (204.83) | 140.57 | 140.58 | 1.44% |
4M | 12/08/2023 | (273.55) | (271.71) | 139.89 | 139.91 | 1.92% |
5M | 01/09/2024 | (356.34) | (352.76) | 139.07 | 139.10 | 2.50% |
6M | 02/08/2024 | (422.37) | (419.16) | 138.41 | 138.44 | 2.96% |
9M | 05/08/2024 | (617.32) | (612.84) | 136.46 | 136.50 | 4.33% |
1Y | 08/08/2024 | (802.72) | (796.49) | 134.60 | 134.67 | 5.63% |
15M | 11/08/2024 | (973.13) | (961.45) | 132.90 | 133.02 | 6.82% |
18M | 02/10/2025 | (1,139.38) | (1,124.92) | 131.24 | 131.38 | 7.99% |
2Y | 08/08/2025 | (1,405.24) | (1,385.82) | 128.58 | 128.77 | 9.85% |
3Y | 08/10/2026 | (1,899.43) | (1,874.88) | 123.64 | 123.88 | 13.31% |
4Y | 08/09/2027 | (2,357.23) | (2,319.40) | 119.06 | 119.44 | 16.52% |
5Y | 08/08/2028 | (2,786.40) | (2,748.11) | 114.77 | 115.15 | 19.53% |
6Y | 08/08/2029 | (3,190.02) | (3,146.29) | 110.73 | 111.17 | 22.36% |
7Y | 08/08/2030 | (3,563.53) | (3,518.58) | 106.99 | 107.44 | 24.98% |
8Y | 08/08/2031 | (3,911.13) | (3,841.19) | 103.52 | 104.22 | 27.41% |
9Y | 08/09/2032 | (4,250.14) | (4,165.55) | 100.13 | 100.97 | 29.79% |
10Y | 08/08/2033 | (4,556.79) | (4,465.35) | 97.06 | 97.98 | 31.94% |
15Y | 08/09/2038 | (5,872.75) | (5,836.79) | 83.90 | 84.26 | 41.16% |
20Y | 08/10/2043 | (6,864.78) | (6,814.06) | 73.98 | 74.49 | 48.11% |
25Y | 08/10/2048 | (7,632.94) | (7,573.87) | 66.30 | 66.89 | 53.50% |
30Y | 08/08/2053 | (8,229.73) | (8,163.23) | 60.33 | 61.00 | 57.68% |
Trade
Strategically Long USDJPY (either spot or forward) - buy the rips or buy the dips - as long as monetary differential between US and JP remains sufficiently wide giving attractive carry trade while recent developments from BOJ with weak policy tweak with treasury bonds seem to face headwinds post credit downgrade, however downside risk may be any black swan events that usually bring demand for yen as a safehaven.
Tactically and ideally 138 handle needs to hold and clear breakout over the downtrend (from Oct 2022 high) would open further upside momentum in the anticipation of retesting 150 handle.
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