Wealthy Nations Daily Update - JGB/Qatar

So the Japanese Government ten-year benchmark bond (JGB) traded with a negative yield in Tokyo overnight, the first for any G7 economy. Trading at -0.035% that means around 70% of outstanding JGBs are now trading with a negative yield. Safe haven buying in a holiday shortened week for Asia amidst a plunge in the Nikkei, down 5.4% at the close, was the main cause.

We have long spoken of our concerns regarding QE and the impact on the real economy especially with regards to deflation and with the Japanese yen trading at its strongest level against the US dollar since Q4 2014, it is hard to calculate the true impact the strong yen will have on the Japanese government's target of 2% inflation.

Mizuho Bank Ltd announced it will cut its long-term prime lending rate to a record 1% and this has sparked further worries about the financial health of the banking sector. In the US, banks are already trading down as their shares take the impact of the debt mountain due to the fall in commodity companies’ assets. In Europe, Deutsche Bank released a statement to assure the market and their employees that they have sufficient financial means to meet its obligations in regard its outstanding Tier 1 notes this year and through 2017. This is the largest lender in at least four years to feel the need to calm fears of a possible financial shortfall.

In the meantime US Treasuries (UST) have rallied further with the ten-year yield falling to 1.69%; levels not seen since February last year but still a “high yielder” when compared to the Bund market, ten-years at 0.25% and of course the JGB market at -0.035%.

For a prolonged period of time we have maintained a relatively high weighted credit rating on our funds believing that the world economic outlook is not so rosy. With this in mind we prefer to invest in Wealthy Nations that have the financial ability to manage any economic downturn. Bonds such as Qatar Government bonds still offer a very attractive yield for their Aa2/ AA/AA rating and although they do face financial challenges as they manage the fall in energy markets they still offer a very high risk /reward. By way of an example the Qatar Government 6.4% maturing January 2040 a US dollar denominated issue, is offered at a price of around 126.75, a spread over UST of 220 bps and a yield of 4.55% a very welcome addition to a portfolio’s holdings.