Japan plans to cut sales of Japanese Government Bonds (JGB) by 500 billion yen, making the total for the fiscal year 2025/2026 reach 171.8 trillion yen. The sales of 20- and 30-year bonds will decrease by 900 billion yen each, dropping to 11.1 trillion yen and 8.7 trillion yen, respectively. On the other hand, sales of 2-year JGBs and one-year and six-month treasury discount bills will increase by 600 billion yen each. Furthermore, JGB sales to households are expected to rise by 500 billion yen, totaling 5.1 trillion yen. The Japanese government is making a rare change to its bond program to reduce sales of super-long bonds by about 10% from the original plan. This decision aims to address market worries after low demand at auctions and a rise in super-long yields. This change follows the Bank of Japan’s recent announcement to slow down bond purchases starting next fiscal year. The new issuance plan will be discussed with primary dealers at a meeting on Friday. The Japanese Ministry of Finance’s recent update shows a significant reduction in the issuance of super-long JGBs for the upcoming financial year. The 10% cut in 20- and 30-year bonds reflects a lack of interest from the market, seen in disappointing auction results and rising yields for these maturities. These adjustments are not just technical; they indicate larger changes in domestic risk preferences and external yield pressures, with ongoing speculation about shifts in monetary policy. The cuts in supply for long-term bonds signal that authorities are trying to stabilize this segment. In theory, lower issuance should help keep yields down or at least slow their increase. Recently, trading behavior shows that super-long bonds are more affected by economic news, both from Japan and abroad. This sensitivity, along with increased volatility and declining investor interest, prompted the ministry to adjust its strategy. While the focus is on reducing longer-term bond sales, shorter-term securities like two-year notes and treasury discount bills are seeing increased issuance. This change indicates that funding needs are not decreasing but simply shifting along the maturity curve. This rebalancing aims to shorten the average duration of outstanding debt and adapt to a rising interest rate environment. Additionally, there is an effort to involve more households in purchasing JGBs. By marketing these bonds directly to retail investors, the government aims to diversify its base of bondholders. When institutional demand fluctuates, tapping into household savings, which are typically more responsive to minor yield changes, can provide a stabilizing effect. The Bank of Japan’s intention to slow its bond-buying reduction adds another layer to this situation. Although it doesn’t mean active easing is back, it does suggest less downward pressure on JGB prices than if the tapering continued unchanged. In response, market participants are already adjusting their strategies, moving away from longer durations and showing increased demand for mid-curve options. Traders who monitor the term structure for relative value should pay attention to these implications. The decrease in super-long bond issuance reduces the tradable float, making financing conditions tighter and changing the cost dynamics for hedging in this sector. A smaller float also raises the risk of squeeze scenarios for ultra-long bond futures, especially near month-end or quarter-end. Traders relying on curve steepening should rethink their strategies based on these supply changes. Past experiences—like those in early 2016 and mid-2021—show that sudden supply shifts can lead to pricing dislocations across nearby maturities, especially when mixed with central bank policy uncertainties. These occurrences aren’t just theoretical; they have real impacts on swap spreads and other pricing structures. Traders using relative value strategies between various points on the curve might need to adjust their duration assumptions. These implications vary: long-dated bond futures, particularly those over 20 years, may experience wider gaps between expected and actual yields. There’s also a risk of overestimating stability expectations from the Bank of Japan. A slower taper of purchases doesn’t mean policy will remain the same; it could shift quickly if economic data surprises positively or external pressures arise. Those with rigid views on policy clarity should be cautious, as liquidity conditions in JGB futures can change rapidly if large players like insurers or pension funds adjust their hedging strategies. We believe some recalibration in the 10s30s segment is still needed. Further tightening may be possible, given the decrease in issuance for longer maturities and a shift towards shorter ones. Strategies involving butterfly spreads should be reassessed, especially considering possible oversupply in the short end. As we move forward, volatility pricing may not adequately capture the range of potential outcomes. Option skew in bond volatility might begin favoring upside protection for longer maturities, as we’ve already seen early signs of increased interest in receiver swaptions for 20-year tenors. Finally, Friday’s dealer meeting might provide additional concrete details. If there are changes to auction frequency, those close to funding operations should prepare for price changes and adjust their repo positions accordingly. Unexpected shifts could directly influence implied forward levels. We’ll keep a close eye on any significant market movements following the announcement.

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