Michael Johnston: PowerShares rolled out a pair of ETNs offering inverse exposure to Japanese government bonds, rounding out a suite of products delivering targeted exposure to one of the world’s largest debt markets. The new ETNs join the existing Japanese Government Bond Futures ETN (NYSEARCA: JGBL) and 3x Japanese Government Bond Futures ETN (NYSEARCA: JGBT), both of which are linked to the DB USD JGB Futures Index. That benchmark consists of 10-year JGB Futures, the underlying assets of which are Japanese-government issued debt securities with a remaining term to maturity of not less than 7 years and not more than 11 years as of their issue date and the futures contract delivery date. The two new ETNs are:
- PowerShares DB Inverse Japanese Government Bond Futures ETN (NYSEARCA: JGBS)
- PowerShares DB 3x Inverse Japanese Government Bond Futures ETN (NYSEARCA: JGBD)
Both will be linked to the same index as the existing long products, with JGBS charging 0.50% annually and JGBD charging 0.95% [see the fact sheet for new ETNs].
Similar to other leveraged ETNs offered by Deutsche Bank and PowerShares, these products will seek to deliver the target leverage multiple (i.e., -1x and -3x) on a monthly basis. In other words, the exposure will not reset on a daily basis, but at the end of each calendar month. That means that the effective leverage realized by investors can vary depending on the timing of the entry into the product. It’s also important to note that the underlying assets that comprise the related benchmark are not Japanese bonds, but futures contracts linked to Japanese bonds. While these securities should generally exhibit very strong correlations to the actual fixed income securities, this nuance can end up having a meaningful impact on bottom line returns and risk profile.
Betting Against Japanese Bonds
As mentioned previously, Japan is home to one of the largest debt markets in the world–a function of both the size of the economy and the substantial leverage maintained. Japanese debt is now more than 200% of GDP, a level that is significantly higher than the “problem” European nations such as Greece and Italy. Yet yields remain fairly low thanks to strong internal demand for Treasuries; Japanese citizens own a significant amount of debt, and the external debt of Japan is only a small portion of the total burden.
Despite the huge debt balance, the Japanese yen–and therefore Japanese bonds–maintain significant appeal as a safe haven investment. So Japanese bonds tend to perform quite well when global equity markets encounter some turmoil, meaning that the new PowerShares ETNs could be attractive when stocks are climbing.
Single Country Bond ETPs
The launch of JGBS and JGBD continues a trend of enhanced granularity in exposure to fixed income markets beyond the U.S. borders. Though most U.S. investors’ portfolios are still dominated by Treasuries and corporate bond from U.S. issuers, the development of some exchange-traded products linked to foreign debt markets is evidence that many are beginning to embrace geographic diversification on the fixed income side of their portfolios. In addition to the suite of Japanese bond ETNs, PowerShares has exchange-traded notes offering long (NYSEARCA: BUNL) and 3x leveraged (NYSEARCA: BUNT) exposure to German Bund futures, as well as long (NYSEARCA: ITLY) and leveraged (NYSEARCA: ITLT) options for accessing Italian debt.
There are other single country bond ETFs covering Australia (AUD), Canada (CAD), and China (RMB, DSUM).
Written By Michael Johnston From ETF Database Disclosure: No positions at time of writing.
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