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
Many U.S. investors tend to have a home bias, forgoing exposure to international investments. International bond ETFs help investors diversify and gain access to a range of different global fixed-income assets. IGOV tracks bonds denominated in local currencies issued by foreign governments in developed markets outside the U.S. The ETF’s effective duration is almost 7.7 years.
“That’s a lot of duration risk for no income. The potential upside is uninspiring, but the possible downside is breathtaking. It won’t take much to cause some pretty big losses for these bondholders, who can no longer count on receiving regular interest payments, because there are none,” according to Bloomberg.
With a 30-day SEC yield of 0.4%, that means IGOV’s annual expense ratio of 0.43% is higher than the ETF’s most recent 30-day SEC yield.
iShares International Treasury Bond ETF
