Nikko launches hedged and unhedged Treasury bond ETFs on Tokyo Stock Exchange

Aug 31st, 2016 | By | Category: Fixed Income

Tokyo-headquartered Nikko Asset Management has launched two new exchange-traded funds on the Tokyo Stock Exchange providing access to the US Treasury bond market.

Nikko AM launch hedged and unhedged Treasury bond ETFs on Tokyo Stock Exchange

The two newly launched ETFs from Nikko AM provide coverage of the US Treasury bond market in the 7-10 year maturity range.

The Listed Index Fund US Bond ETF (Tokyo: 1486) and the Listed Index Fund US Bond (Currency Hedged) ETF (Tokyo: 1487) both track the S&P US Treasury Bond 7-10 Year Index, with the latter hedged version mitigating the impact of adverse fluctuations between the US dollar and yen through the use of one-month currency forwards.

The S&P US Treasury Bond 7-10 Year Index measures the performance of US Treasury bonds maturing in 7-10 years and is calculated in Japanese yen.

“The very low interest rate environment means that many Japanese institutional market participants are searching for alternative sources of yield and diversification in their portfolio” said James Rieger, Head of Fixed Income at S&P Dow Jones Indices. “We are pleased that S&P Dow Jones’ US fixed income indices are the benchmarks used by ETFs that give Japanese market participants a potential solution for higher yielding assets.”

As of 30 August 2016, the yield on 7 year US Treasury bonds was 1.44% and the yield on 10 year bonds is 1.57%.

Current probabilities derived from the Federal-funds futures curve indicate the market does not expect the central bank to increase rates when they meet in September. As of 31 August 2016 investors and traders see a 27% likelihood of a rate increase at the September Federal Open Market Committee meeting, although this is up slightly from 24% from the previous day. This bodes well for investors in the ETFs as bond prices fall when rates increase. The probability of an increase by December is 59% though.

Each ETF has an approximate actual cost of 0.17% including tax but excluding ‘other fees and costs’ which include items such as auditing costs, index royalty fees, and listing expenses. These will be capped at 0.10% per annum.

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