From May twenty-sixth, twenty twenty-five to May twenty-seventh, twenty twenty-five
I. Foundation
resistance to change and hence greater dependability for the results shown in the past.
The real issue in the Japanese bond market: supply and demand, not Bond Vigilantes
There are generally two reasons for selloffs in the super-long bond market. One is the so-called Bond Vigilantes, I looked it up specifically; in China it is translated as “bond vigilantes,” but actually The idea is simple: some institutions that influence market pricing begin demanding higher yields as a warning about a lack of fiscal discipline..
This applies more strongly to U.S. Treasuries; applying it to Japanese government bonds is a bit of a stretch, and at least so far, the market has not traded on that basis.
A large share of the outstanding Japanese government bonds is held by the Bank of Japan, the process of restoring the functioning of the domestic bond market is still underway, which means that, at least in the near term, the Japanese government bond market will not see trading dynamics like those of Bond Vigilantes.
Another perspective is more fundamental and better reflects how the Japanese government bond market currently operates: the underlying issue is supply and demand...
The current surge in Japanese ultra-long-term yields is primarily being driven by an extreme supply-demand imbalance in the corresponding maturity segment, and the Bank of Japan’s latest survey of bond market participants supports this view (the “Bond Market Survey,” published in BOJ 5, explicitly states that the functioning of Japan’s bond market is impaired).
Liquidity in Japan’s ultra-long-term bond market has fallen sharply, making it difficult for prices to form steadily between buyers and sellers in a sufficiently deep market...
More specifically, at the “Bond Market Group Meeting” held by BOJ on 5 20–21, several participants expressed the view that they hoped the Bank of Japan would help restore trading activity in ultra-long-term JGB.
Participants pointed out:“Given the severe decline in liquidity in the ultra-long-term market, the BoJ should consider a range of flexible responses, including halting the reduction of bond purchases, directly increasing purchase volumes, and even merging the maturity buckets for 10 years and longer into a single bucket (merging of the 10y+ maturity buckets into a single bucket).”
But BOJ’s room to act on issues in the ultra-long-term market is clearly limited, because its overall plan to reduce JGB purchases cannot easily be changed, The deterioration in supply and demand in the ultra-long-term market stems from insufficient investment demand caused by structural factors, which is fundamentally not a problem the central bank can solve.
The macroeconomic issue of fiscal discipline should be addressed by the government; the supply-demand issue in ultra-long-term JGB, in turn, should be addressed by the Ministry of Finance through adjustments to the issuance structure in its government bond management policy.
However, as can be expected, at the monetary policy meeting in 6, the Bank of Japan will need to issue an updated bond purchase plan framed as a “mid-term assessment.” The plan should neither surprise market participants nor obstruct the Ministry of Finance’s debt management policy, and it should not needlessly further undermine market sentiment.
Everyone can keep a close eye on this when the time comes.
The main point is that U.S. Treasuries and Japanese government bonds now have different trading dynamics. They are, of course, linked, but the situation still needs to be viewed from different perspectives.
2025.05.26
II. Insights
Our Viewpoints and ideas on market...
The case for shorting oil prices (continued): A new paradigm, a new era, a new alliance... before oil and gas assets become stranded
The 1973 export embargo ushered in a major era of energy security, With the world highly dependent on external oil supplies, the Organization of the Petroleum Exporting Countries monopolized oil prices; whenever gunfire erupted in the Middle East, it could easily impose a “geopolitical risk premium” on the market, unchallenged.
But times have changed... by 2025, the global energy supply landscape had shifted, so that oil prices(adjusted for inflation)fell even below the level in 1973 10 (11.65 dollars per barrel then, compared with 11 dollars now). Thanks to exploration technology, abundant capital, and mature infrastructure, oil development and marketing are now highly efficient...
And “global oil demand has peaked” has become a new and unshakable certainty.
The United States is now the world’s largest energy producer; its logic is no longer that of an importer, but of a dominant player.OPEC has long been marginalized; Venezuela and Angola have exited; Algeria’s fiscal breakeven is now 125 dollars per barrel, while Russia continues to increase production. In fact, Iran is now more prominent for its nuclear weapons and terrorism; at 400 million barrels a day, it has no pricing power..Any disruption to oil supply can be quickly offset by other producers.
Meanwhile, at the beginning of 5, Trump’s visit to Saudi Arabia and the UAE, marked the beginning of a new alliance:
What matters is not where the money is, but where it is going...
Saudi Arabia (1200 barrels) + the United States (2110 barrels) + Russia (1100 barrels) together account for nearly 50% of global production... Trump’s grand reception in the Middle East is, in essence, a sign that a new axis of energy-producing countries is taking shape...
The common task facing major oil-producing countries today is to monetize their assets in an orderly way as early as possible, before oil and gas assets become “stranded assets”,
No one wants to follow in Venezuela’s footsteps.
On his first day in office, Trump declared a national energy emergency, established 28-day approval channels, repealed emissions standards for gas-fired power plants and the gas cap, reopened ANWR, and pushed full speed ahead with crude oil and natural gas production and exports. As LNG export terminals are built and pipelines continue delivering natural gas to power plants and AI data centers, the dual engines of Electrification + gas will become an irreversible trend for decades to come.
The history of an energy paradigm shift is repeating itself.
2025.05.27
III. Market Pulse
Our latest Comments on the economic and market environment
Note: All content herein is for reference only, does not constitute investment advice, and does not serve as a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for making decisions.