World’s Worst Bond Market Faces Another Big Supply Shock

Core Viewpoint - Japan's government bond market is facing significant challenges due to the largest net increase in supply in over a decade, with an 8% rise in net supply expected to reach approximately ¥65 trillion ($415 billion) in the upcoming fiscal year [1]. Group 1: Market Conditions - The deterioration in supply-demand conditions may necessitate the government to adjust bond issuance quarterly [3]. - The benchmark 10-year bond yield has risen to 2.13%, the highest level since 1999, with expectations that it could reach a fair value of around 2.2–2.3% [7]. Group 2: Central Bank Actions - A major factor contributing to the increase in net supply is the Bank of Japan's (BOJ) decision to reduce monthly gross purchases by over a quarter to approximately ¥2.1 trillion [5]. - The BOJ's holdings are projected to decrease by ¥46.5 trillion in the next fiscal year, compared to ¥41.1 trillion in the current period [5]. Group 3: Investor Behavior - Banks and pension funds have been the primary buyers since the BOJ began loosening its control on bond yields, with net purchases exceeding ¥30 trillion since April 2023 [6]. - However, concerns are rising that these purchases may not be sufficient to absorb the increasing net supply [6]. Group 4: Performance Comparison - Japanese bonds experienced a loss of over 6% last year, marking the worst performance among more than 40 sovereign markets, while U.S. Treasuries gained 6.3% and German securities fell by 1.6% [4].