Japan plans to cut its 2025 issuance of super-long Japanese Government Bonds (JGB) by 3.2 trillion yen. This change has been expected since May. The issuance of 20-year bonds will decrease by 200 billion yen per auction. Additionally, both 30-year and 40-year bonds will be cut by 100 billion yen per auction.

Balancing The Reductions

To balance these cuts, Japan will increase the issuance of 5-year and 2-year notes, along with Treasury bills. This strategy aims to keep the market stable and meet funding needs. Japan’s decision to reduce super-long bond issuance shows an effort to change its debt profile. This choice, expected since May, aligns with feedback from bond market players, especially primary dealers who are concerned about poor auction results for longer maturities. Monthly issuance of 20-year bonds will drop by 200 billion yen each auction, while 30-year and 40-year bonds will see a reduction of 100 billion yen. These adjustments indicate a cautious approach, especially given the weaker demand observed for long-term bonds. It suggests that debt managers are responding carefully to what investors want and their willingness to take on duration risk. On the other end of the curve, there will be an increase in shorter-dated bonds. The government plans to issue more 2-year and 5-year notes, along with more Treasury bills. This move, though familiar, highlights a strategy to improve liquidity in the mid-range of the yield curve. This is especially important now, as global rate volatility has made it tougher to sell long bonds without offering higher yields. Policymakers appear to be prioritizing flexibility and cost-effectiveness.

Market Implications And Adjustments

We’ve seen similar adjustments in the past—shifting more issuances to shorter maturities to relieve pressure on long bonds. For those involved in interest rate futures and swaps linked to JGBs, this change in bond issuance may reduce volatility over time, especially for shorter maturities. The swap curve might also reflect this adjustment, with slightly narrower spreads in the mid-range, while super-long tenors may maintain a premium in the near term. Traders with positions in term structure steepeners or flattener strategies in yen rates might need to reevaluate their approach. The reduced supply at the long end increases scarcity, but this doesn’t always lead to price increases, particularly if rate expectations remain stable or rise slightly. Market liquidity for 20- to 40-year bonds may tighten further, making rolling trades or arbitrage between cash and futures less appealing. We might also see changes in auction participation, as dealers may lower their bids unless pricing incentives improve. At the short end, increased issuance of 2- and 5-year notes could limit short-term gains in these maturities, while also providing better options for hedging short-term risks. Portfolios heavily invested in short gamma related to bills or short-note futures may experience small fluctuations in daily prices, slightly affected by the increased supply. Overall, we can see a shift in market flow. We are moving from focusing on curve risk to a strategy that emphasizes stable funding and liquidity. This change signals a need to reassess exposure levels across different maturities, taking into account supply dynamics and auction behavior. Traders should start to track auction schedules closely, as relative value discrepancies may appear more often around those dates. Create your live VT Markets account and start trading now.

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