April 26, 2018 / 7:20 AM / 2 years ago

INTERVIEW-Tokio Marine plans to increase euro corp bonds, U.S. floaters

* To increase currency-hedged foreign bonds holdings

* To maintain yen bond holdings flat, cut domestic stocks

By Hideyuki Sano and Shinji Kitamura

TOKYO, April 26 (Reuters) - Tokio Marine & Nichido Fire Insurance plans to increase its holdings of foreign bonds in the year to March, focusing on euro corporate bonds and floating rate dollar bonds, senior investment planning officials said on Thursday.

The core unit of Tokio Marine Holdings has no plan to reduce currency hedging on its foreign debt investment in the current financial year to next March, the officials also said.

“We will focus mostly on euro denominated bonds given the high cost of dollar hedging,” said Masahiro Tajima, manager of asset allocation at Tokio Marine told Reuters in an interview.

The costs of dollar hedging is linked to U.S. short-term interest rates and have been rising sharply in recent quarters due to the Federal Reserve’s rate hikes.

Interest rates in the euro zone remain deep in negative, meaning the cost of hedging is negative, or in other words, Japanese investors can earn extra income by making currency hedge rather than paying a cost.

Within the euro zone debt market, Tokio Marine will be focusing on corporate and agency bonds, Tajima added.

The firm expects the global economy to be moderately strong with limited acceleration in inflation. Trade frictions could affect market sentiment but are unlikely to have a big impact on the economy, Tajima said.

“Until the U.S. mid-term election, the issue will not be solved. We don’t expect a trade war but there won’t be a trade peace either,” he said.

As for dollar assets, the insurer is looking to floating-rate products to make the most of the likely U.S. rate hikes.

“So far we have been buying mostly fixed-coupon bonds. But we are looking into a shift to floating-rate bonds, such as securitised products,” Tajima said.

Tokio Marine plans to maintain full currency hedging on foreign bonds, officials said.

“The exchange rate risk has a strong correlation with Japanese stocks, of which we already have quite a lot. So when we look at the risk-return (trade-off) of our entire portfolio, foreign bonds without currency hedging is not attractive,” Tajima said.

The insurance firm plans to reduce its Japanese stock portfolio, as their price volatilities remain one of biggest business risks for the company, officials also said.

In the year that ended on March 31, it cut its domestic stock holdings by 100 billion yen, they also said.

Editing by Vyas Mohan

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