October 22, 2018 / 7:23 AM / 2 months ago

INTERVIEW-Taiyo Life to increase foreign debt holdings, but will give Treasuries a pass

* Dollar-denominated debt to remain foreign bond mainstay

* 70 pct of foreign bonds holdings hedged, to retain ratio in H2

* To keep trimming Japan bond holdings in H2

* May consider buying super-long JGBs after BOJ policy tweak (Adds details and quotes)

By Shinichi Saoshiro and Takefumi Ito

TOKYO, Oct 22 (Reuters) - Japan’s Taiyo Life Insurance plans to continue increasing its foreign bond holdings in the second half of the financial year through March 2019, but U.S. Treasuries won’t be part of its investment plans for that period, a senior executive told Reuters on Monday.

The insurer, a unit of T&D Holdings with about 7.25 trillion yen ($64.39 billion) in assets, also said it plans to keep trimming its yen bond holdings in the October-March period.

The company’s foreign government bond buying in the first half was limited to modest purchases of French sovereigns, Masanori Nakamura, general manager at the investment planning department of Taiyo Life, told Reuters in an interview.

“We will keep increasing foreign bond holdings in the second half, centred on dollar-denominated instruments. But we did not purchase U.S. Treasuries in the first half, and we don’t plan on buying them in the second half because of rising hedge costs,” Nakamura said.

A steady increase in demand for the greenback, the global funding currency of choice, has raised the cost for Japanese holders of Treasuries looking for protection against foreign exchange rate fluctuations through currency hedging.

The insurer’s dollar-denominated debt purchases in April-September consisted of assets that offer a certain spread above Treasuries, Taiyo Life said. These included corporate bonds, “Ginnie Mae” agency bonds issued by the U.S. Government National Mortgage Association (GNMA) and dollar bonds Japanese state agencies issue.

About 70 percent of its foreign bond holdings are currently hedged, Taiyo Life said, adding that it intended to retain the ratio in the second half.

While dollar-denominated debt will remain the mainstay of its foreign bond portfolio, purchasing euro zone bonds would be an option in the second half due to increasing hedge costs dollar bonds entail, Nakamura said.

As for Japanese bonds, Taiyo Life said it trimmed its holdings in the first half and plans to keep cutting investments in the second half.

Low domestic yields due to the Bank of Japan’s easy monetary policy have prompted Japanese life insurers to increasingly seek better returns abroad.

“We did not buy super long maturity Japanese government bonds (JGBs) at all in the first half,” Nakamura said.

“While our overall Japanese bond holdings are set to decrease in the second half, we might buy super-long JGBs like 20-year debt as their yield swings have widened after the BOJ tweaked its policy in July.”

The 20-year JGB yield climbed to a 20-year peak near 0.700 percent this month after the central bank in July said it would allow the benchmark interest rate it guides under its yield curve-control scheme to move in a wider range, perceived by some investors as a small step towards policy normalisation.

Taiyo Life expects the dollar, currently at 112.71 yen , to reach 112.00 yen by the end of the second half. It forecasts the 10-year Treasury note yield, at 3.20 percent on Monday, to reach 3.40 percent by March-end. ($1 = 112.5900 yen) (Reporting by Shinichi Saoshiro and Takefumi Ito; Editing by Shri Navaratnam and Subhranshu Sahu)

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