A PLANNED cut to the Bank of Japan’s (BOJ) bond purchases will probably focus on seven- to 10-year notes, data on the BOJ’s debt portfolio suggest.
The monetary authority’s holdings are concentrated on tenors of 10 years and shorter, where it owns about two-thirds of the amount outstanding. The share in debt maturing in more than 10 years is much smaller at 26 per cent.
The BOJ holds 83 per cent of the so-called cheapest-to-deliver securities for the front-month futures contract, and this share jumps to a whopping 95 per cent for the March contract. Memories are still fresh of how BOJ operations sucking CTD debt led to a blowup in an arbitrage strategy using bonds and futures in mid-2022.
“The BOJ is likely to cut purchases of five- to 10-year notes more than others due to large purchases of these tenors relative to issuance,” said Eiji Dohke, chief bond strategist at SBI Securities in Tokyo. Otherwise, “the cheapest-to-deliver securities will disappear from the market at some point in the future”.
The central bank kicked off its two-day policy meeting on Tuesday (Jul 30). Economists expect it to halve monthly debt buying to three trillion yen (S$26.2 billion) in two years, based on their median estimate.
There are signs of nervousness everywhere in the bond market. Ten-year swap spreads are below zero near the lowest since at least late 2021 on a closing basis, meaning bonds have cheapened relative to swaps. Implied volatility of 10-year note futures climbed to the highest since October on Monday.
Minutes of a meeting between the central bank and market participants on Jul 9 to 10 showed diverse opinions. Some called for a cut to short-to-intermediate notes to avoid a jump in volatility, while others said the priority should be given to super-long debt to shorten the duration of the BOJ’s portfolio.
“The planned decrease in the BOJ’s bond buying is expected to centre around tenors of 10 years and less where there’s good demand from private investors and where the central bank’s buying is big,” said Naoya Hasegawa, chief bond strategist at Okasan Securities in Tokyo. “The BOJ will probably avoid touching purchases of super-long bonds so as not to make market participants more anxious about supply and demand.” BLOOMBERG
