Japanese government bonds and related exchange traded products have been on a streak this year, with Japan becoming the first major economy with a sub-zero yield on benchmark 10-year debt.
The DB Japanese Govt Bond Futures ETN (NYSEArca: JGBL), which tracks 10-year Japanese government bond futures, rose 3.8% year-to-date. Meanwhile, the DB 3x Japanese Govt Bond Futures ETN (NYSEArca: JGBT), which takes the 3x or 300% performance of 10-year JGB futures, rose 7.2% so far this year.
Potential exchange traded note investors should be aware that Deutsche Bank has suspended further issuance on JGBL and JBGT. While JGBL has shown little trading activity, JGBT has attracted increased interest, with volumes on Tuesday almost double the average. Consequently, since new shares are no longer created, the ETNs may experience wide premiums to net asset value on increased demand. JGBT currently shows a 3.44% premium to its NAV.
Japanese government bonds are gaining momentum as global uncertainty pushed investors into safe-haven assets. Consequently, yields on benchmark 10-year Japanese government bonds dipped to negative 0.03% on Tuesday – the yield traded as low as negative 0.05% earlier.
“The bear market in risk assets is evolving very quickly,” Andrew Milligan, head of global strategy at Standard Life Investments, told the Financial Times. “A month ago the focus was China, then oil, then the prospect of US recession, now it is European financial companies.”
The negative yield on a bond essentially means people are paying for the privilege of lending to the Japanese government. With yields now down into the negative territory, it also suggests that there is continued demand for JGBs.
The moves in Japanese debt come just a little over a week after the Bank of Japan surprised markets by adopting negative interest rates. The rising trend for negative yields in developed world government debt has augmented demand for safe-haven assets as investors reassess exposure to riskier assets.
“Markets are pricing that the BOJ will cut interest rates to negative 0.3 percent by the end of the year,” Takuji Okubo, managing director and chief economist at Japan Macro Advisors, told CNBC.
ETF investors can also gain exposure to Japanese government bonds through more diversified international Treasury bond options. For instance, Japanese government bonds make up 23.5% of the SPDR Barclays International Treasury Bond ETF (NYSEArca: BWX) and 22.8% of the iShares International Treasury Bond ETF (NYSEArca: IGOV). Year-to-date, BWX is up 3.3% and IGOV is 4.3% higher.
DB 3x Japanese Govt Bond Futures ETN
Max Chen contributed to this article.