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Basis Trade Blowup Adds New Drama to BOJ Fight With Bond Market

  • BOJ move to buy cheapest-to-deliver bonds catches out traders
  • Japanese bond futures have seen wild swings this week
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BOJ Holds Interest Rate Steady at -0.1%
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Pockets of Japan’s bond market are imploding as the central bank battles to keep control of its policy goals and beat back those betting against it.

A small tweak to the Bank of Japan’s bond purchase plan this week blew up an arbitrage strategy popular with overseas investors known as the basis trade. It exacerbated a supply shortage of government bonds that has ramped up pressure on domestic financial institutions, leading them to turn to the BOJ for help to relieve the strain.