The Ministry of Finance (MOF) has sought input from primary dealers regarding the potential for further reductions in the issuance of long-term government bonds. Sources familiar with the matter have indicated that the ministry distributed a questionnaire on Wednesday, focusing on the possibility of curtailing enhanced liquidity auctions. These individuals requested anonymity due to the non-public nature of the information.
This move by the MOF is prompted by concerns over the rapid increase in yields on long-dated bonds, which some consider to be excessive. It follows a previously announced plan from June to decrease the volume of 20-, 30-, and 40-year bonds sold at regular auctions. The ministry has not yet provided a public comment on this recent development.
The MOF typically consults with market participants before its annual primary dealer meeting in September to determine the amounts for enhanced liquidity and inflation-linked bond issuance. This time, the survey specifically sought opinions on reducing enhanced liquidity issuance by ¥100 billion for bonds with maturities ranging from 15.5 to 39 years, as well as potentially omitting the October auction for those tenors.
Super-long bond yields are currently near their highest levels in years, influenced by the Bank of Japan's reduction in its substantial bond purchases and growing concerns about fiscal expansion. The MOF had previously surveyed market participants in May before implementing a reduction in super-long bond issuance, which began in July.
The MOF regularly conducts these auctions to issue additional older bonds that have become less liquid. The purpose is to improve market stability and facilitate the buying and selling of bonds. According to Ataru Okumura, a senior interest-rate strategist at SMBC Nikko Securities, consecutive reductions in super-long bond issuance could lead to expectations of continued cuts until the supply-demand balance improves, ultimately correcting the undervaluation of these bonds.
5 Comments
Karamba
This is an appropriate, measured, and strategic approach. The MOF is doing a great job.
Matzomaster
This is not an ideal situation but a step of the right direction!
Noir Black
This is a very short-term strategy. What does the long game for these issues look like?
Leonardo
Less supply = higher borrowing costs down the line. This could stifle economic growth. Bad move, MOF.
Michelangelo
This is a good example of responsive policymaking, acting on the reality on the market!