Deutsche Bank debuts six ETNs linked to Japanese, German, Italian sovereign bond futures

By Emma Trincal

New York, March 23 - Deutsche Bank AG, London Branch introduced six new PowerShares exchange-traded notes that offer for the first time leveraged and unleveraged exposure to futures contracts traded on German, Italian and Japanese sovereign bonds, according to an FWP filing with the Securities and Exchange Commission.

"We are delighted to expand our successful exchange-traded platform to now include foreign fixed income futures-based products," Martin Kremenstein, director at Deutsche Bank, said in a bank press release.

"In addition, we are pleased to provide investors a convenient way to take a view on the sovereign debt of Germany, Italy and Japan."

The returns of each ETN are obtained by combining the month-over-month performance or three times the month-over-month performance of the underlying index - the DB USD Bund Futures index for Germany, the DB USD BTP Futures index for Italy and the DB USD JGB Futures index for Japan - with the monthly returns of the DB 3-Month T-Bill index, less an investor fee, according to the press release.

Pioneer ETN

"I think it's great," said Tom Lydon, president of Global Trends Investments. "These are the first of their kind as far as three times leverage ETNs in these asset classes."

"This is definitely unique. These DB PowerShares are first in class. There's nothing else out there," said Paul Weisbruch, vice president of exchange-traded funds and options sales and trading at Street One Financial.

"Fixed-income managers who are trying to manage risk will find it appealing. It's nice to have a new toolbox," he added.

"If they trade the underlying bonds, now they have a way to hedge their risk or take a view on it. For instance, last year one very popular trade was to be short short-term Treasuries. When products like the Direxion leveraged short-term Treasury ETF launched, it became a very profitable trade."

Wide-ranging uses

Sources said that the uses of the new family of ETNs could be broad.

"The product is intended for asset allocators, long-term traders and short-term traders looking to hedge their exposure," said a person familiar with the situation. "It's both for retail and institutional investors."

Lydon said that the Japanese series of notes could be timely for investors given the recent disaster.

"In the aftermath of the Japanese earthquake we've seen a lot of repatriation of Japanese capital out of the U.S., and it pushed up the yen as people sold Treasuries and bought the yen. As Japanese go through the process of rebuilding, their bonds will continue to appreciate as more money continues to come back to Japan," he said.

The case for being long German government debt depended on one's view about the dollar, he noted.

"You'd think that rates would go up in Germany, but who's the weakest link? The U.S. will continue to have a weak currency, and Germany may be stronger than the U.S.," he said.

The Italian trade may not be obvious now, but opportunities may arise, he said.

"I'm not as confident about Italy for obvious reasons. But what's great about these new ETNs is that they give investors more choices if they see some opportunities."

Monthly reset

Another advantage and possible use for the sovereign bond futures ETNs would be to give more opportunities to investors who are not necessarily versed in short-term trading, said Lydon.

"Most leveraged ETNs compound and reset daily, so it tends to give you an ultra short investment timeframe. It's good for very short-term trades," he said.

But leverage in these new PowerShares DB series is reset on a monthly basis. As a result, Lydon said that the product could be used more broadly by investors or even traders who have a longer investment horizon and not just by short-term traders.

The ETN format versus an ETF offers the advantage of reducing possible tracking errors, he said. On the other hand, investors tend to have "less confidence" in ETNs when comparing them to ETFs because of the credit risk ETNs are subject to.

But the creditworthiness of the issuer of the new notes was relatively good, Lydon noted.

"Deutsche Bank is in a great situation compared to two years ago, and there is less concern about a default," he said.

Dollar bears

Investors in the ETNs are exposed to currency risk, according to the prospectuses.

That's because the notional investment is calculated in the foreign currency, but returns at maturity are converted into dollars. As a result, returns will increase if the value of the dollar decreases against the currency of the foreign country, which could be either the euro or the yen.

"It's a bearish bet on the dollar," said Lydon.

"The timeliness of this introduction is not just that it's the first three times leveraged ETN on those three countries' debt. It's also a bet on further weakening of the dollar as investors are looking for a stronger currency."

The ETNs are listed for trading on the NYSE Arca under the following symbols:

• "BUNL" for the PowerShares DB German Bund Futures ETNs;

• "BUNT" for the PowerShares DB 3x German Bund Futures ETNs;

• "ITLY" for the PowerShares DB Italian Treasury Bond Futures ETNs;

• "ITLT" for the PowerShares DB 3x Italian Treasury Bond Futures ETNs;

• "JGBL" for the PowerShares DB Japanese Govt Bond Futures ETN; and

• "JGBT" for the PowerShares DB 3x Japanese Govt Bond Futures ETNs.

For each series, Deutsche Bank registered to sell up to $80 million and sold $4 million of the notes. All six ETNs began trading on Wednesday.

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