The report says that Japan’s ministry of finance is considering revisions to the framework of its existing liquidity-enhancement auctions for JGBs. This is a move that is said to be intended to ease supply pressures on the super-long end of the curve in the bond market.
For some context, the liquidity-enhancement auctions are ones that are run to provide supply for bonds that are no longer the most recently issued for a specific maturity, having been superseded by newer issuances.
In the case of Japan, the issuances are divided into three maturity buckets:
- Over 1 year to 5 years
- Over 5 years to 15.5 years
- Over 15.5 years to under 39 years
But starting from April, Tokyo officials are said to be mulling plans to narrow the mid-term bucket – which typically receives a relatively large allocation. The change will see that be switched to a bucket of “Over 5 years to 11 years” with the long-end bucket switching to “Over 11 years to under 39 years”.
The sources note that the idea here is to fit this with a combination of reduced new issuance in super-long JGBs in order to bolster market confidence among investors and help ease yields in the secondary market.
In other words, it is all about rebalancing supply to match that up against actual market demand. And by reducing the amount of new debt coming into the market while using these auctions to improve the trading of existing debt, that helps to reduce supply pressures that typically drives yields higher.
That is essentially the goal here that Tokyo officials are trying to achieve. And at the same time of course, the narrowing of the mid-term bucket allows the ministry of finance to more precisely target the specific maturity zones where demand is highest
