May twenty-six, two thousand twenty-five to May twenty-seven, two thousand 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 ultra-long bonds. One is the so-called Bond Vigilantes, I looked it up specifically; in China it’s 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 bonds is a bit of a stretch. At least for now, that is not how they are being traded.
A large share of outstanding Japanese government bonds is held by the Bank of Japan, and its efforts to restore the functioning of the domestic bond market are still under way. This means that, at least in the short term, Japanese bonds are unlikely to see trading driven by a logic similar to that of Bond Vigilantes.
Another perspective is more basic and better aligned with how the Japanese bond market currently operates: the fundamental issue is supply and demand...
The surge in current Japanese ultra-long yields is mainly driven by an extreme supply-demand imbalance in the corresponding maturity segment, and the Bank of Japan’s latest survey of bond market participants also supports this view (BOJ’s Survey on the Bond Market, published in 5, explicitly states that the functioning of Japan’s bond market is impaired).
Liquidity in Japan’s ultra-long 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 and 21, several participants expressed the view that the Bank of Japan should help restore trading activity in ultra-long JGB.
Participants noted:“Given the severe decline in liquidity in the ultra-long market, the Bank of Japan should consider a range of flexible responses, including pausing reductions in bond purchases, directly increasing purchase volumes, and even merging the duration buckets for maturities of 10 years and above into a single bucket (merging the 10y+ maturity buckets into a single bucket).”
But BOJ clearly has limited room to act on problems in the ultra-long market, because its overall plan to reduce JGB purchases cannot easily be changed, The deterioration in supply and demand in the ultra-long market stems from insufficient investment demand due to structural factors, a problem that fundamentally cannot be solved by the central bank.
The macroeconomic issue of fiscal discipline should be addressed by the government; the supply-demand problem in ultra-long JGB, meanwhile, should be handled by the Ministry of Finance by adjusting the issuance structure in its government debt management policy.
However, it can be expected that at the monetary policy meeting in 6, the Bank of Japan will need to issue an updated bond purchase plan based on a “midterm assessment.” The plan should neither surprise market participants nor obstruct the Ministry of Finance’s debt management policy, and it should not unnecessarily further depress market sentiment.
Everyone should follow this closely when the time comes.
The main point is that the trading logic for U.S. and Japanese bonds is different now. Of course, they are linked, but we should still look at them 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... monetizing oil and gas assets before they become stranded
The 1973 export embargo ushered in the era of energy security, With the world highly dependent on external oil supplies, OPEC monopolized oil prices. Whenever gunfire broke out in the Middle East, it could easily impose a “geopolitical risk premium” on the market, seemingly unstoppable.
But times have changed... By 2025, the global energy supply landscape had shifted, so that oil prices(adjusted for inflation)even below the level in 1973 10 (then 11.65 dollars per barrel, now 11 dollars)Thanks to exploration technology, abundant capital, and mature infrastructure, oil development and marketing are now highly efficient...
And “peak global oil demand” has become a new, unshakable certainty.
The United States is already the world’s largest energy producer; the logic is no longer that of an importer, but of a dominant player.OPEC has long been marginalized; Venezuela and Angola have withdrawn; Algeria’s fiscal breakeven is now 125 dollars per barrel; Russia continues to increase production. In reality, Iran is now more prominent for its nuclear weapons and terrorism, with 400 million barrels per day and no pricing power...Any disruption in oil supply can be quickly made up by other producers.
On the other hand, in early 5, Trump’s visit to Saudi Arabia and the UAE, marking the beginning of a new alliance:
What matters is not where the money is, but where it goes...
Saudi Arabia (1200 million barrels) + the United States (2110 million barrels) + Russia (1100 million barrels) together account for nearly 50% of global production... Trump’s lavish reception in the Middle East essentially signals the formation of a new axis of energy-producing nations...
The common task of major oil-producing countries today is to monetize their assets early and in an orderly way, before oil and gas assets become “stranded assets”,
No one wants to follow Venezuela’s path.
On his first day in office, Trump declared a national energy emergency, established an approval channel with a 28-day timeline, repealed emissions standards for gas-fired power plants and the gas cap, lifted restrictions on ANWR, and pushed hard to expand crude oil and natural gas production and exports. As LNG export terminals are built and pipelines continue supplying gas to power plants and AI data centers, the twin engines of electrification and gas will become an irreversible trend for decades to come.
The history of energy paradigm shifts 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 and does not constitute investment advice or serve as a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for their decisions.