World’s Biggest Bond Traders Undeterred by Negative Yields

It might be considered absurd, if not for the unprecedented contortions in global financial markets.
Pacific Investment Management Co.’s largest international bond fund and China are piling into negative-yielding Japanese debt, buying securities that pay out less than the purchase price. And there’s a way to turn a tidy profit off the trade.
At the heart of the strategy is the world’s insatiable appetite for dollar assets, which is presenting an opportunity for investors with greenbacks to spare: the chance to pick up extra yield, a luxury in an era of record-low interest rates. For dollar lenders, even three-month Japanese bills, trading at a rate of negative 0.24 percent, offer juicy returns through a swap transaction that locks in exchange rates.
Pimco, which manages $1.51 trillion, is one dollar-rich investor looking to tap into the phenomenon. Its Foreign Bond Fund, which protects against currency swings, added short-dated Japanese government debt in the first quarter, data compiled by Bloomberg show. China’s been another big buyer, accumulating a record amount of bills last quarter, Japanese Ministry of Finance data show.
‘We can in some markets buy even negative-yielding assets and hedge them into U.S. dollars to create attractive positive yields,’ said Sachin Gupta, who helps manage the $7.8 billion Pimco fund from Newport Beach, California. Short-dated Japanese debt ‘is as close to a risk-free instrument as is possible’ in the country, and, when held to maturity, the profit is locked in from the start, he said.

This post was published at bloomberg