Cheapesttodeliver cash bond set to be scarce
Dealers wary of disruption to JGB futures
Normal bond market is years away, says strategist

TOKYOSINGAPORE, Oct 2 Reuters Japan39;s 9 trillion bond market is bracing for disruption as a shortage of paper caused by the central bank39;s massive buying is expected to hit the settlement of derivatives used by investors and the dealers who underwrite the nation39;s debt sales.

Decades of fighting deflation drove the Bank of Japan BOJ into asset purchases and made it the majority owner of the country39;s national debt, with a balance sheet bigger than the 4 trillion economy and five times the size of the U.S. Federal Reserve39;s, relative to gross domestic product.

That has kept yields down and made the Japanese market unattractive to investors, leaving its bonds illiquid and unreliable as a benchmark for interest rates.

Now as the BOJ pares back its balance sheet towards a normalisation of markets, the longawaited revival of trading in the debt pool is proving a slow and bumpy process.

A test looms in the futures market from December when 10year contracts will be linked to the government bond 366 tranche that is 95 owned by the BOJ.

Participants say the bond39;s scarcity in the open market will interfere with buying the socalled 39;cheapesttodeliver39; bonds to settle derivatives contracts at maturity, crucial for the market to trade smoothly and price with precision.

The lack of the cheapesttodeliver bonds makes it hard…