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J.P. Morgan Chase CEO Jamie Dimon vowed Wednesday that he “would never buy a negative-rate bond.”
Turns out, he already has.
The ownership may not be direct. But the investing arm of Dimon’s business indeed has a significant stake in negative-yielding debt through a popular exchange-traded fund whose biggest holding is in a German bond that matures in 2029 and carries a yield of about minus 0.26%.
J.P. Morgan Private Investments has a 24.4% ownership stake in the Vanguard Total International Bond (BNDX) fund, according to FactSet. J.P. Morgan Chase Bank also has a small piece of the fund, which has $25 billion in assets and is the largest ETF in its class.
Institutions own 63% of the BNDX, leaving more than one-third of the stake in the hands of retail investors looking for some global fixed income exposure in their portfolios.
In addition to holding German fixed income instruments, the highest concentration of its total investments by geography is in Japan, which has negative rates on its yield curve all the way through 10 years. The next biggest concentration is in France, which also has negative yields through 10 years.
Negative yields, higher prices
“I would never buy a negative-rate bond, not unless I was forced,” Dimon told CNBC’s “Squawk Box” at the World Economic Forum in Davos, Switzerland. “In history, whenever you’ve seen anything like that, it doesn’t necessarily end well.”
However, for J.P. Morgan and other investors in the ETF, negative-yielding debt can serve as an effective diversification tool.
Negative yields imply that those lending money to governments are paying to do so. That’s not really the case, though, and the distinction is important for the $11 trillion or so of global sovereign debt that carries below-zero yields.
Buyers of the bonds instead pay a premium above 100 cents on the dollar for this debt. When bondholders pay more for the bond than they receive in yield over the duration, that makes the rate negative as prices and yields move in opposite directions. That means that as those yields go more “negative,” it’s because the prices are rising, an equation that helps bond funds.
Over the past year, the BNDX fund has gained about 7.9%, well below the 26% surge for the S&P 500 but just below its fixed income benchmark, according to Morningstar.
“The funds that were invested in these [bonds] had a pretty good year last year through September,” said Nicholas Colas, co-founder of DataTrek Research. “The joke was 2019 was when you bought stocks for yield and bonds for capital appreciation.”
The iShares International Treasury Bond is another such fund, though its biggest holdings are in Ireland and Portugal. The SPDR Bloomberg Barclays International Bond ETF has considerable concentration in Japan.