Country-Specific Bond ETNs Debut

by on March 24, 2011 | ETFs Mentioned:

PowerShares and Deutsche Bank have teamed up on a new suite of exchange-traded notes offering exposure to debt issued by the governments of Japan, Italy, and Germany, marking the first time U.S. investors have been able to access the debt of a specific country through an exchange-traded product. The new offerings include a plain 1x option and a 3x levered option for each debt market [see Are Bond ETFs Broken?]:

  • 3x German Bund Futures ETN (BUNT): Designed to deliver monthly returns that correspond to 300% of the change in the DB USD Bund Futures Index [see BUNT fact sheet].
  • German Bund Futures ETN (BUNL): Offers exposure to the U.S. dollar performance of German Euro-Bund futures [see BUNL fact sheet].
  • 3x Italian Treasury Bond Futures ETN (ITLT): Offers leveraged exposure to the DB USD BTP Futures Index, a benchmark that includes futures linked to intermediate-term debt issued by the Republic of Italy [see ITLT fact sheet].
  • Italian Treasury Bond Futures ETN (ITLY): Offers exposure to the U.S. dollar performance of Italian Euro-Treasury futures [see ITLY fact sheet].
  • 3x Japanese Government Bond Futures ETN (JGBT): Offers leveraged exposure to the DB USD JGB Futures Index, a benchmark that includes futures contracts linked to debt issued by the Japanese government that has approximately ten years until maturity [see JGBT fact sheet].
  • Japanese Government Bond Futures ETN (JGBL):Offers exposure to the U.S. dollar performance of Japanese Treasury futures [see JGBL fact sheet].

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Investors are now equipped with ETFs offering targeted equity exposure to dozens of far-flung and obscure economies, including the likes of Egypt and Vietnam. And the current crop of bond ETFs allows for the slicing and dicing of the U.S. fixed income market in countless different ways. Yet ETF options for bond exposure beyond the U.S. have been limited historically, as there are various hurdles to delivering exposure to this asset class through a true 1940 Act ETF.

Existing products in the International Government Bonds ETFdb Category have cast a wide net, focusing on debt of issuers in a number of different countries. The same goes for most products in the Emerging Market Bonds ETFdb Category, which last week saw the introduction of the WisdomTree Asia Local Debt ETF (ALD). That actively-managed fund was one of the more targeted exchange-traded products available, as it focuses on debt issued by primarily the governments of about a dozen developed and emerging economies.

The new PowerShares DB notes are the first exchange-traded products to offer country-specific bond exposure beyond the U.S. But the six new additions to the ETP lineup aren’t cut from exactly the same cloth as popular bond products such as AGG or JNK. First off, the related indexes are comprised of futures contracts as opposed to actual bonds. Moreover, the new products are exchange-traded notes–debt instruments issued by Deutsche Bank. This structure likely made it possible to offer exposure to the asset classes covered, sidestepping some of the challenges issuers seeking to package European bonds in an ETF might encounter.

Japanese Bonds In Focus?

The timing of the launch could make the notes focusing on Japanese debt a big success with investors. In the wake of the devastating earthquake and tsunami, uncertainty continues to swirl over Japan as a nuclear crisis remains a distinct possibility and the challenges of rebuilding the country lie ahead. After sliding in recent sessions, Japanese bonds surged on Wednesday on speculation that the Bank of Japan would make a massive injection into the country’s financial system to encourage investors to buy government debt.

Japan is one of the most indebted countries in the world, as the government’s liabilities exceed 200% of GDP–a considerable burden considering that the island nation is the third largest economy in the world.

Italy vs. Germany: Two Ends of The Quality Spectrum

The Italian and German bonds could generate interest as well, as the two countries are quite different in terms of risk profiles. Germany is generally viewed as the most fiscally stable of the euro zone economies, and the credit risk of other countries are often measured relative to yields on German bonds. Italy is a member of the “PIIGS” bloc of the five economies in the euro zone deemed to pose the greatest risk of default, as the country has been plagued by high unemployment, slowing growth, and mounting debt burdens.

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Disclosure: No positions at time of writing.