ETF, ETN, and Funds For Germany's Debt Concerns (BUNL, BUND, EWG, GF, BUNT)

The new question of the week is whether or not Germany will get pulled down into the soup with the rest of Europe on the growing debt woes.  A horrible bond auction on Wednesday in Germany now has investors continuing to worry that the strong nations can be taken down by the weak nations.  There are now exchange-traded products for U.S. investors and traders who want long (or short) exposure to Germany’s debt markets via the PowerShares DB German Bund Futures ETN (NYSE: BUNL) and the PIMCO Germany Bond Index Fund (NYSE: BUND) and there are other German-backed funds and exchange-traded products as well.

Germany is supposed to be the strongest and most important pillar of the Eurozone economies.  So what happens if the credit markets close off even to a nation of this much importance?  The German bunds are supposed to be close to U.S. Treasury offerings as far as sovereign debt instruments.  The reality is that Germany is not going to be cut off from borrowing in the credit markets, but the yield that it will have to pay is likely to now remain higher for some time.  That will also in turn drive up every other European nation’s borrowing spreads as well.

The disaster auction that has been referenced was only supposed to be a 6 billion Euro bund with a ten-year maturity, which ultimately yielded only 3.9 billion Euros.  Zacks Investment Research noted that this was the sixth time out of the last eight German debt auctions where the Bundesbank was forced to take on some of the supply.  Another Zacks statistic was that the ratio of total bids to accepted bids was only 1.07. 

The impact has moved 10-year German government yields up over 1.9% initially and that appears to have moved over the 2.0% mark now.  While still very low, the yield was under 1.6% in mid-November. Two fairly new ETFs have allowed U.S. investors to get into the German bund market, just in time for Eurozone woes to harm them.

While the iShares MSCI Germany Index (NYSE: EWG), which tracks the German stock market, is up almost 1% today at $18.45, this ETF hit a low of $18.27 on Wednesday and was above $19.00 on Monday and was above $20.00 as recently as November 17.  Its 52-week range is $16.96 to $29.05. 

Closed-end fund investors also have the New Germany Fund Inc. (NYSE: GF), which is down 0.5% at $12.25 and its 52-week range is $12.06 to $18.90.  The Closed-End Fund Association notes a discount of 9.35% to its net asset value in the premium/discount analysis.

PowerShares DB German Bund Futures ETN (NYSE: BUNL) started trading in late-March and the price rose from $20.00 to about $23.00 by September. The current price is $22.29.  No catastrophe at all, but the drop on Wednesday went to $22.29 from $22.65 the day before.  For whatever this is worth, the price is actually still above the $21.97 close seen on October 14. The “BUNL” offers U.S. investors exposure to the U.S. dollar value of the returns of a German bond futures index by tracking the performance of Euro-Bund Futures where the underlying assets of the contract are Federal Republic of Germany-government issued debt securities.  The maturity range is actually eight years and six months to 10 years and six months.  As thi is an ETN rather than an ETF and as this tracks futures contracts, be advised that this product does not actually hold German bunds.  If there is an issuer problem in the future, the owners of this product would be senior unsecured debt creditors of Deutsche Bank. 

There is also the PIMCO Germany Bond Index Fund (NYSE: BUND) as a more broad play on the German bond market and it tracks the BofA Merrill Lynch Diversified Germany Bond Index of euro-denominated investment grade bonds in Germany.  The fund can hold bonds issued by German entities such as sovereign debt (bunds), as well as what are called quasi-government bonds; it can also hold corporate bonds and securitized and collateralized debt instruments.  It actually holds German bunds, and debt issuance from Land Nordrhein-Westfalen, corporate debt and Federal Republic debt.

We generally avoid covering much on the leveraged exchange-traded products, but there is also the PowerShares DB 3x German Bund ETN (NYSE: BUNT).   

Now, before you damn all Euro-debt keep in mind that the “BUNL” is still up more than 10% since its inception earlier this year.  The “BUND” has only been a public entity since the second week of November.  These exchange-traded products are also very thin in trading volume right now as many investors and traders are not even aware of them.

JON C. OGG