* Benchmark cash 10-year bonds untraded for day and a half
* BOJ's buying results in shortage of tradable bonds, dents
* Fall in liquidity could eventually lead to sharp reversal
in the market
By Hideyuki Sano
TOKYO, April 15 The Bank of Japan's massive
purchases of government debt hit a milestone this week, sucking
liquidity out of the market to such an extent that the benchmark
10-year bond went untraded for more than a day, the first time
in 13 years.
Data from the BOJ late on Monday showed its holding of
Japanese government bonds topped 200 trillion yen ($1.96
trillion), or about 20 percent of outstanding issuance - up by
more than half from 125 trillion yen about a year ago.
The fall in market liquidity looks set to intensify as the
BOJ has vowed to continue its aggressive buying for at least
another year, with market players expecting it to expand its
easing some time later this year.
"Everybody thinks the market is not going to move for the
time being because of the purchase by our dear customer, the
BOJ," said a trader at a major Japanese brokerage.
The BOJ stepped up its bond buying last April when Haruhiko
Kuroda became its governor, vowing to take radical easing steps
to end deflation once and for all.
The increasing dominance of the BOJ in the market, however,
resulted in shortage of tradable bonds in the market, reducing
trading flows between market players.
Brokers are reluctant to go short, fearing that they cannot
buy back when they want. On the other hand, few investors are
willing to chase prices higher, when the 10-year bonds yield
about 0.6 percent
The upshot was that the average daily trading band of
10-year JGB futures price so far this month is 0.15, compared to
about 0.50 in the 10-year U.S. Treasury notes futures.
The current 10-year cash bonds saw its first trade of the
week on Tuesday afternoon, having gone untraded for more than a
day and a half.
Trade volume in the benchmark cash bonds so far this month
dropped to less than one trillion yen, down about 70 percent
from the same period last year.
In a sign that the BOJ is also worried about falling bond
market liquidity, the central bank tweaked its JGB repo
programme on Monday, saying it will offer to sell JGBs twice a
day, compared to once a day now.
Yet traders shrugged off the measure as a drop in the ocean.
And with the BOJ seen mopping up another 60-70 trillion yen
of JGBs from the market, few investors are ready to pick up a
"Everybody is holding off buying now only because they want
to buy at a higher yield. But in the end, the only strategy you
can take under an environment like this is buy more given the
shortage of what you can buy," said Takeo Okuhara, fund manager
at Daiwa SB Investments.
One reason many investors are cautious about buying despite
tight market conditions is the trauma of sharp reversal in the
market rally after the BOJ adopted the current policy last
The 10-year JGB yield hit a record low of 0.315 percent on
the following day after the BOJ's easing, only to jump back to
1.0 percent about a month later -- a scenario market players
think can be repeated, given the fall in liquidity.
"I know this could end badly. But if you are in this market,
you will have no choice but to buy," Daiwa SB's Okuhara said.
($1 = 101.8500 Japanese yen)
(Additional reporting by Hiroyasu Hoshi; Editing by Ron