Global central banks have cut interest rates to near zero, with some pushing into negative territory. As yield-starved global investors seek alternative avenues of income, more may turn to relatively more attractive U.S. government debt, supporting U.S. Treasuries-related exchange traded funds (ETFs).
For instance, after the Bank of Japan implemented negative interest rates, BlackRock’s fixed-income ETFs have attracted $1 billion in assets, Bloomberg reports.
“We have seen a significant amount of inflow into our global fixed income ETFs from Japanese institutions,” Jason Miller, head of the ETF unit in Tokyo at BlackRock, told Bloomberg. “The underpinning of that trend has been the natural shift from large institutions out of JGBs into the global fixed income exposures and equities. It’s accelerated by the negative interest rate.”
Japanese investors have hoarded a record $46 billion in U.S. Treasuries in March alone after yields on over 70% of local government bonds dipped below zero. Even accounting for a strengthening yen currency or weakening U.S. dollar, U.S. 10-year Treasuries have higher yields than the longest yen sovereign notes.
Yields on benchmark 10-year U.S. Treasuries are hovering around 1.71%. In contrast, yields on 30-year Japanese Government Bonds were at 0.34%, and the JGB 10-year note yields a negative 0.12%.
The low yields overseas may continue increase demand for relatively higher yielding U.S. Treasuries and help support related ETFs. For instance, the iShares 7-10 Year Treasury Bond ETF (IEF) has a 7.57 year duration and a 1.58% 30-day SEC yield.
Trending on ETF Trends
Investors can also look toward the upper end of the yield curve with long-term Treasury bond ETFs. For example, the iShares 20+ Year Treasury Bond ETF (TLT) has a 17.72 year duration and a 2.44% 30-day SEC yield. The PIMCO 25+ Year Zero Coupon US Treasury (ZROZ) has a 27.34 year duration and a 2.56% 30-day SEC yield. The Vanguard Extended Duration Treasury ETF (EDV) has a 24.8 year duration and a 2.57% 30-day SEC yield.
Japanese investors first started with U.S. Treasuries and investment-grade debt as their own yields plummeted. Now, they have targeted European notes as well, Miller said. The rising demand for international bonds has helped increase interest for fixed-income ETFs.
“Fixed-income ETFs now allow global investors a ready, efficient way to access that market very quickly, without having to go out and purchase individual bonds,” Stephen Laipply, an ETF strategist and managing director at BlackRock, told Bloomberg.
ETF investors can also gain exposure to the strengthening global debt market through international Treasury bond ETFs, including the SPDR Barclays International Treasury Bond ETF (BWX) and the iShares International Treasury Bond ETF (IGOV) .
IGOV includes a hefty 22.6% tilt toward Japan, along with many Eurozone states like France 6.7%, Italy 6.5%, Germany 4.9%, U.K. 4.8%, Ireland 4.7% and Portugal 4.7%, among others. The ETF has a 7.89 year duration and a 0.26% 30-day SEC yield.
BWX also holds Japan 22.9%, U.K. 7.9%, Italy 6.9%, Francey 6.8%, Netherlands 4.7% and Belgium 4.7% among its top country components. The fund has a 8.20 year duration and a 0.54% 30-day SEC yield.
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