* To focus on non-government debt
* Trim yen bond exposure amid low domestic yields
* Increase investment in alternative assets (Adds details, quotes)
By Shinichi Saoshiro and Takefumi Ito
TOKYO, April 23 (Reuters) - Japan’s Taiyo Life Insurance plans to continue increasing its foreign bond holdings this financial year with a focus on non-government debt, a senior executive told Reuters on Monday.
The insurer, a unit of T&D Holdings with about 7.25 trillion yen ($67.29 billion) in assets, also said it plans to trim its yen bond holdings and increase investments in alternative assets.
Faced with low domestic yields that have been driven down by the Bank of Japan’s extensive monetary easing, Japanese insurers have increasingly sought better returns abroad.
U.S. Treasuries have been at the core of foreign bond purchases by Japanese insurers, but an increase in the cost to hedge currency risks from holding Treasuries have prompted Japanese insurers to seek higher-yielding foreign debt assets.
The cost of hedging currency risks is determined by factors including interest rate differentials. And, the recent widening of the U.S.-Japan interest rate spread, driven by a divergence in both countries’ monetary policies have made it more expensive for Japanese investors to hedge their dollar-denominated assets.
“We did buy Treasuries last financial year (ended March 2018), but our dollar-denominated debt purchases were focused on supra-national and corporate bonds,” said Masanori Nakamura, general manager at the investment planning department of Taiyo Life.
The foreign bond holdings, which make up about a quarter of its 7.25 trillion yen portfolio, will be hiked for the current financial year ending March 2019, Taiyo Life said.
“Our foreign debt purchases this financial year will continue to centre on assets that offer certain spreads above government bonds,” Nakamura said.
“We expect the U.S. Federal Reserve to hike interest rates a total of four times in 2018 and Treasury yields should rise accordingly. But their returns won’t be attractive considering the currency hedging costs involved.”
The insurer said it reduced the ratio of its currency-hedged foreign bond holdings to 70 percent from 78 percent in the previous financial year.
On yen bonds, which make up about 37 percent of its portfolio, Taiyo Life said the current low-yield environment at home will prompt it to trim exposure to the assets this fiscal year.
The insurer expects the 10-year Japanese government bond (JGB) yield, which is currently at 0.055 percent, to be zero by the end of March 2019.
Taiyo Life said it bought mortgage-backed securities (MBS) for the first time last financial year, and also increased its foreign equity holdings to diversify its portfolio.
For the current financial year, the insurer said it will increase investments in alternative assets.
“Alternative assets provide an opportunity to diversify our holdings from our traditional holdings. Their returns are not big, but they offer steady returns,” Nakamura said.
Taiyo Life expects the dollar, at 107.750 yen on Monday , to range between 95 yen and 120 yen during the current financial year, and settle at about 112 yen in March 2019. ($1 = 107.7500 yen) (Reporting by Shinichi Saoshiro and Takefumi Ito; Editing by Biju Dwarakanath)