Compress What You See, Not What You Say: Anchored Context Distillation for Latent-Observation Software Engineering Agents

Zhensheng Zou, Guoqing Wang, Dan Hao

Tool observations dominate the context of software-engineering agents, making long interaction histories costly to maintain. Existing context compression methods can discard information needed by later actions, while adapting agents to soft-token representations can compromise their original behavior. To reduce context while preserving action-critical information and agent behavior, we combine Latent Observations, Hard Actions (LOHA), a context layout that separates compressed history from text needed for exact reference, with Anchored Context Distillation (ACD), a training method that enables latent reading while constraining behavioral drift. LOHA compresses older tool observations into soft tokens while retaining the agent's own turns and the last K observations in text, providing compact access to historical information and exact access to recent content. To enable the agent to use this representation, ACD distills the base model's full-text predictions into the latent view while anchoring its behavior on plain-text inputs to the same base model. On SWE-bench Verified, K=3 reduces context per call by 43% for Qwen3-4B and 57% for SWE-Master-4B-RL, with resolve rates of 12.1%…