Last week, Japan became the latest country to turn to negative interest rates as a monetary policy tool. Asia’s second-largest economy joined the likes of Denmark and Sweden, among others, in turning to negative interest rates, a move that punishes local savers and fixed income investors in those countries’ bonds.
Falling yields in fixed-income assets could push investors to riskier and higher-yielding assets in the Eurozone. In contrast, money managers are more pessimistic about U.S. Treasuries with the Fed normalizing interest rates ahead.
Observers anticipate that the tepid growth and deflationary pressures in the Eurozone could force the ECB to expand stimulus in 2016, which J.P. Morgan Chase & Co. will help Europe outperform the U.S., despite the myriad of debt problems that the region has faced.
However, negative rates could prove problematic for exchange traded funds such as the iShares International Treasury Bond ETF (NASDAQ: IGOV). IGOV, which has a 30-day SEC yield of just 0.4%, allocates 22.4% of its weight to Japanese bonds.
“The fund lost 3.5 percent over the past year even as bonds of developed economies gained pretty much across the board. What does it own? Mostly European sovereign debt, with a smaller, 22 percent slice in Japanese notes, Bloomberg data show,” reports Lisa Abramowicz for Bloomberg. http://www.bloomberg.com/gadfly/articles/2016-02-02/bond-safety-becomes-treacherous-as-fees-outweigh-yields