BlackRock Lures $1 Billion to Bond ETFs in Japan on Minus Rates

  • BlackRock saw ‘accelerating interest’ on negative rate policy
  • U.S. Treasury ETF with hedging option just introduced in Japan

BlackRock Inc. is flying specialists to Tokyo to pitch exchange-traded funds to Japanese banks and insurers hurt by negative yields.

The nation’s institutional investors have parked about $1 billion in BlackRock’s fixed-income ETFs since the Bank of Japan’s Jan. 29 announcement of its minus-rates policy, said Jason Miller, head of the ETF unit in Tokyo at the world’s biggest provider of such funds. The New York-based firm this week introduced a product that tracks the performance of U.S. Treasuries for its Japanese bank clients with an option to hedge currency risks.

“We have seen a significant amount of inflow into our global fixed income ETFs from Japanese institutions,” Miller said in an interview Thursday. “The underpinning of that trend has been the natural shift from large institutions out of JGBs into the global fixed income exposures and equities. It’s accelerated by the negative interest rate.”

Japanese investors bought a record $46 billion of U.S. Treasuries in March alone, reflecting a slump in yields on more than 70 percent of local government bonds below zero. Even when hedged against currency moves, U.S. 10-year Treasuries have higher yields than the longest yen sovereign notes.

Out of $73.8 billion of inflow into all ETFs this year, global fixed-income funds have seen net flow of about $53.4 billion, according to data compiled by Bloomberg. As investors pour money into those products, an estimated $2.2 trillion left the global equity market. 

“Fixed-income ETFs now allow global investors a ready, efficient way to access that market very quickly, without having to go out and purchase individual bonds,” San Francisco-based Stephen Laipply, an ETF strategist and managing director at BlackRock, said in a separate interview in Tokyo.

Money managers looking for alternatives to negative rates in Europe and Japan are buying debt elsewhere, sending average yield to a record low 1.279 percent as of May 11, according to the Bank of America Corp.’s Global Broad Market Index.

Face with declining loan rates and bond yields, profits at Japan’s biggest banks are set to drop this fiscal year as interest income declines. Banks were the largest holders of Japanese government bonds with 298.3 trillion yen ($2.7 trillion) as of March 2015, while insurers held 196.6 trillion yen, according to the Bank of Japan.

The interest from Japanese investors started with U.S. Treasuries and investment-grade debt, and then expanded to European notes this year, Miller said. Fixed-income ETFs track a portfolio of bonds, meaning that investors are exposed to the risks that actual noteholders face, according to Laipply.

Goldman Warning

Goldman Sachs Group Inc. said Japan is a potential source for an international selloff in bonds. While the nation’s debt has driven a worldwide rally this year, the notes now look overvalued, it said. Germany’s “bund tantrum” erased more than $750 billion in value from global sovereign debt last year.

BlackRock’s iShares U.S. Treasury Bond 7-10 Year JPY Hedged ETF offers a yield of 1.74 percent and 0.6 percent after hedging, according to the firm. That compares with a yield of 0.33 percent on 40-year Japanese government bonds, the nation’s longest sovereign debt.

BlackRock had $285 billion of fixed income ETFs under management as of the end of 2015, a 30 percent increase from a year earlier and accounting for more than half of such funds in the industry, it said.

Following the global trend, demand for fixed-income ETFs from Japanese investors may exceed those for similar funds investing in other assets as well, Miller said.

“Fixed-income ETFs have outpaced overall ETF growth significantly,” said Miller. “In Japan, it is very early days, so that growth may look even more interesting from a percentage perspective, but we have a lot to do around education and awareness.”

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