As Japan steers toward a negative rate environment, Treasury bond exchange traded funds bounced, with benchmark yields dipping to nine-month lows, on increased demand for U.S. dollar-denominated assets.
The iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), which has a 7.57 year effective duration and a 1.86% 30-day SEC yield, was up 0.4% Friday.
The iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT), which has a 17.47 year duration and a 2.57% 30-day SEC yield, was also up 0.7% Friday.
Treasury bonds rallied and yields retreated after the Bank of Japan said it would introduce negative rates to stimulate the economy.
“The big news overnight was Japan going to negative rates, which quickly gave a bid to Treasuries and for that matter all of fixed income in general,” Justin Lederer, a Treasury strategist at Cantor Fitzgerald, told Reuters.
With yields depressed, Japanese investors may turn to more attractive yield generating U.S. dollar-denominated assets, like Treasury bonds. The yield on 10-year Japan government bonds was 0.09% Friday. In contrast, benchmark 10-year Treasury yields dipped to an intra-day low of 1.911%, its lowest since April.
Moreover, the BOJ’s looser monetary policy has dragged on its currency, which also makes USD-denominated assets more attractive to Japanese investors as the greenback is expected to continue appreciating against the yen.