Playing The Japanese Downgrade (JGBT, JGBL, IGOV, FXY)

Tim Seymour:  Japanese investors really don’t care what a foreign rating agency has to say about their credit. And since they are the biggest buyers of Japanese debt, their sentiment matters a lot. 

In fact, after hearing last week that Moody’s cut Tokyo’s sovereign debt rating to Aa3 — bringing it in line with China, Taiwan and Chile — the Japanese bond market shrugged.

If anything, Japanese government bonds (JGBs) are seeing a much better bid than one might expect.

Prices on 10-year JGBs edged up 7 basis points on the news, keeping the yield at a minimal 1.02% despite the country’s apparent fall from ratings-agency grace.

Corporate bonds fared somewhat worse since they are now facing a knock-on downgrade if they were rated above Aa3 previously.

This is another indication that not everything rises and falls according to the rating agencies’ opinions. You can see the strength in JGBs — and maybe even trade their continued popularity among Japanese investors — via PowerShares DB 3x Japan Gov Bond ETN (NYSE:JGBT) and the ultra-long PowerShares DB Japan Gov Bond ETN (NYSE:JGBL), which promises to deliver triple the performance:

Other “international” bond funds, such as iShares S&P/Citi Intl Treasury Bond ETF (NYSE:IGOV), generally keep about 20% to 25% of their assets in JGBs as well.

And if the bond market is taking this as a non-event, don’t expect Moody’s to have unintentionally handed the Bank of Japan any gifts in the form of a weakening yen.

The yen and the associated currency fund CurrencyShares Japanese Yen Trust (NYSE:FXY) are as strong as ever today:

Written By Tim Seymour From Emerging Money

Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.

About Tim Seymour: Tim is a founder of Emerging Money. He is a founder and Managing Partner at Seygem Asset Management, and The Emerging Markets Contributor to CNBC. Seygem Asset Management focuses on investing throughout the global emerging markets asset class. With a view that emerging and developing economies will continue to outpace the economic growth and advancement of developed economies, Seymour has devoted a career to investing in the dominant markets of tomorrow, today. Seymour’s career has included significant experience in both alternative asset management (hedge funds) and capital markets, having launched two hedge funds, and built the largest Russian broker dealer in the USA. Seymour started his career at UBS, focusing on international credit (cash, swaps, forex) in a specialized hedge fund group (New York). Seymour completed the firm’s training program after graduating with an MBA in international finance from Fordham University. Seymour received his undergraduate degree at Georgetown University.

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