Japan's $9 trillion bond market is bracing for disruption as a shortage of paper caused by the central bank's massive buying is expected to hit the...
TOKYO/SINGAPORE - Japan 's $9 trillion bond market is bracing for disruption as a shortage of paper caused by the central bank's massive buying is expected to hit the settlement of derivatives used by investors and the dealers who underwrite the nation's debt sales.
A test looms in the futures market from December when 10-year contracts will be linked to the government bond #366 tranche that is 95% owned by the BOJ. With the BOJ having embarked on a rate hike path, investors are also seeking the cheapest bonds to settle short positions in futures, and distortions in the derivatives market would hurt them.A shortage of such bonds will imply "hedging with futures is not functioning," said Masayuki Koguchi, executive chief fund manager at Mitsubishi UFJ Asset Management.Japanese government bond futures are listed on the Osaka Stock Exchange.
That tranche was the 10-year benchmark in 2022 when Japan's central bank was buying billions in bonds to defend a 0.25% yield cap against speculative short sellers. "This situation reflects the adverse effect of the BOJ's easy monetary policy," said Miki Den, a senior Japan rate strategist at SMBC Nikko Securities.
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