BlackRock lures US$1b to bond ETFs in Japan on minus rates

[TOKYO] 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 US$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 US 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," Mr 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 US$46 billion of US Treasuries in March alone, reflecting a slump in yields on more than 70 per cent of local government bonds below zero. Even when hedged against currency moves, US 10-year Treasuries have higher yields than the longest yen sovereign notes.

Out of US$73.8 billion of inflow into all ETFs this year, global fixed-income funds have seen net flow of about US$53.4 billion, according to data compiled by Bloomberg. As investors pour money into those products, an estimated US$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 per cent as of May 11, according to the Bank of America Corp's Global Broad Market Index.

The interest from Japanese investors started with US Treasuries and investment-grade debt, and then expanded to European notes this year, Mr 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 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 US$750 billion in value from global sovereign debt last year.

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

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

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

BLOOMBERG