Japanese yen swaption premium values surged during the two-week period ended on 16 February due to the continued sell-off in JGBs amid the decline in risk tolerance among dealers. The selloff had started after the 20-year auction on 22 January. Weaker-than-expected results of last Friday’s 5-year auction caused caution towards tomorrow’s 20-year auction to increase further, providing swaptions with an extra push higher.
The surge in vols was seen across the board except for gammas that enter into short- to mid-term swaps. The 1-month into 10-year straddle rallied to the 100bp area (versus 73-74bp on 2 February) with offers seen around 105bp and bids above 95bp. But apparently no actual trades went through. The 1-month into 20-year was indicated at 290/300bp, compared to 236bp on the first trading day of the month.
One noteworthy price action seen today was a spike higher in 1- to 2-year expiries with tails of 5s or 7s (such as 2-year into 5-year). The spike higher was apparently not flow-driven, but the price action drew attention given the fact that mid-term swap rates were better received today and did show signs of stabilising.
Going forward, tomorrow’s 20-year auction is definitely monitored very closely as people think that the auction will be an important decider for JGBs’ near-term direction.
As the BoJ is expected not to offer JGB buying operations from tomorrow through Thursday, yields could rise easily should the auction produce poor results.
