Taiwan ETFs Buy Big Into U.S. Credit

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One of the fastest-growing sources of investors in U.S. bonds is Taiwan.

Yield-hungry insurers plowed $3 billion into Taipei-based exchange-traded funds that buy U.S. fixed income in the last two weeks of June, according to research by Bank of America Corp. The surge boosted U.S. fixed-income assets under management in the ETFs by 16% to $22.5 billion.

U.S.-focused bond ETFs in Taiwan have quintupled in size since June 2018 when they totaled about $3.7 billion, the research shows. The buying is likely to continue as Taiwanese insurers can invest as much as about $65 billion in the ETFs, Bank of America Credit Strategist Hans Mikkelsen said.

Taiwanese insurers have invested for years in so-called Formosa bonds issued in the domestic market by foreign corporations and governments. But local regulators began discouraging the practice in 2018 because the bonds are primarily denominated in U.S. dollars, creating a potential currency mismatch for the insurers because they write most of their policies in Taiwan dollars.

The insurers adapted by pouring capital into shares of locally managed ETFs that became their proxy buyers of U.S. bonds. The trend accelerated this year as yields on larger swaths of investment-grade debt in Europe and Japan dipped into negative territory.

Purchases by Taiwanese funds have boosted ETFs’ already significant ownership of U.S. corporate bonds. ETFs now account for about 13% of the $21 billion investment-grade corporate bonds traded on average each day in the U.S., up from 6% in 2017, according to Bank of America research.

U.S. government-bond yields fell Monday, with the yield on the benchmark 10-year Treasury note trading at 2.043%, from 2.048% Friday. Yields fall as bond prices rise. The WSJ Dollar Index, which measures the U.S. currency against a basket of 16 others, rose slightly to 90.12 from 90.01 Friday.

Write to Matt Wirz at matthieu.wirz@wsj.com

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