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.
“The negative rate announcement by the BOJ sent investors into dollar assets, pushing up prices of Treasurys. But the yields are still trading within a fundamentally-based range of 1.75%-2.5%,” Guy LeBas, chief fixed income strategist at Janney Montgomerry Scott, told Dow Jones Business News.
However, gains in Treasuries were capped Friday after data showed U.S. economic growth slowed in the fourth quarter. Gross domestic product expanded at a 0.7% annual pace in the past three months, compared to the 2% growth over the third quarter.
U.S. government bonds have been enjoying strong January performances for three consecutive years. Treasuries gained 1.8% this month through Thursday after returning 3% in January 2015 and 1.8% in January 2014, according to Bloomberg.
Year-to-date, IEF gained 2.8% and TLT increased 4.7%.
iShares 7-10 Year Treasury Bond ETF
Max Chen contributed to this article.