The Bank of Japan has sold some of its holdings of futures-linked 10-year government bonds to improve the trading liquidity of these securities, which are often used as hedging tools against market volatility.
The BOJ owned ?8.03 trillion ($53.5 billion) of the bonds due in March 2032 as of Nov. 29, down from ?8.23 trillion on Nov. 20, data released late Tuesday showed. It is important for the market that there is liquidity in these bonds because they are the cheapest-to-deliver securities underlying the March contract for 10-year bond futures.
The cheapest-to-deliver bonds are those that minimize the seller¡¯s cost when converted to the futures contract price.
The BOJ regularly sells government bonds with repurchase agreements to boost liquidity. In these repo operations, participants can ask for a reduction in the amount they have to sell back to the central bank. Such a reduction happened for the first time since April 4, 2023, according to the bank¡¯s financial markets department.
Futures traders often turn to the central bank to borrow cheapest-to-deliver bonds for meeting their transaction obligations or arbitrage trading. For instance, the BOJ holds over 80% of the four tranches of futures-linked notes maturing in 2031 and 2032, data compiled by Bloomberg show.
The BOJ¡¯s sale of the cheapest-to-deliver securities has eased concerns of investors who trade futures that they would be squeezed because of the scarcity of the bonds, said Takashi Fujiwara, head of fixed income management and chief fund manager at Resona Asset Management.
¡°I expect the central bank to take similar steps for other futures-linked debt, contributing to improvement in market functioning,¡± Fujiwara said.
The central bank also owns more than half of the government bonds that are yet to mature, straining liquidity in the market. The BOJ¡¯s latest survey of market participants showed most respondents felt the need for improvement in bond market parameters like bid-ask spreads, order quantity and trading frequency.
With Japan¡¯s inflation staying above the the BOJ¡¯s target of 2%, the central bank has a roadmap to reduce its monthly bond purchases by about ?400 billion every quarter through to March 2026.
With your current subscription plan you can comment on stories. However, before writing your first comment, please create a display name in the Profile section of your subscriber account page.