October 26, 2018 / 7:21 AM / 9 months ago

Japan insurers seek foreign debt, but demand for U.S. Treasuries soft

* Japan life insurers’ preference for foreign bonds intact

* But higher FX hedging costs suppress interest towards Treasuries

* Demand for JGBs still low, but bump up in yields stirs interest

* For individual reports on each insurer, click

* Table of the insurers’ investment plans

By Shinichi Saoshiro

TOKYO, Oct 26 (Reuters) - Japanese life insurers are poised to buy more foreign bonds in the second half of the current fiscal year, but high currency hedging costs have stifled their demand for U.S. Treasuries.

Most of the country’s nine largest private life insurers plan to keep raising their foreign bond holdings in the second half of the fiscal year ending March 2019, according to summaries of investment plans obtained by Reuters in interviews and at news conferences this month.

Seeking better returns, Japan’s life insurers have steadily diversified their portfolios into foreign bonds over past years as domestic debt yields declined under extremely low central bank interest rates.

But the cost of protecting dollar-denominated debt - their main foreign bond investments - against foreign exchange rate fluctuations has increased along with rising U.S. yields and strong funding demand for the greenback, nudging investors away from Treasuries.

Nippon Life Insurance plans to shift their currency-hedged holdings towards U.S. credit products, as well as European sovereign and corporate bonds, while reducing Treasuries and mortgage-backed securities.

Taiyo Life Insurance said their dollar-denominated debt purchases in the first half of the fiscal year consisted of assets that offer a certain spread above Treasuries, such as corporate bonds, “Ginnie Mae” agency bonds issued by the U.S. Government National Mortgage Association (GNMA) and dollar bonds Japanese state agencies issue.

“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,” said Masanori Nakamura, general manager at the investment planning department of Taiyo Life.

Recent U.S. Treasury Department data underlined such a stance towards U.S. government debt, with Treasuries held by Japanese investors dropping in August to $1.029 trillion, the lowest since October 2011.

On the other hand, Japanese investor demand for U.S. debt that provides higher returns relative to Treasuries has increased.

Gross Japanese purchases of dollar-denominated bonds issued by U.S. government corporations, federally sponsored agencies and corporations have risen steadily, according to data from the Treasury International Capital System (TIC).

High currency hedging costs have also prompted a move towards unhedged foreign bonds.

Insurers such as Dai-ichi Life Insurance and Meiji Yasuda Life Insurance said they will look to buy unhedged foreign debt in the second half during bouts of yen appreciation.


While insurers’ overall demand for Japanese government bonds remains subdued, the increase in currency hedging costs coupled with a recent rise in longer-dated yields has stirred interest in domestic debt.

Yields rose after the Bank of Japan in July said it would allow the benchmark interest rate it guides under its yield curve-control scheme to move in a wider range, a change that was perceived by some investors as a small step towards policy normalisation.

As a result the “super long” 30-year JGB yield climbed to 0.950 percent early in October, its highest since February 2016, from a 1-1/2-year low of 0.665 percent set in July.

In light of the rise in yields, Fukoku Mutual Life Insurance said it would not rule out investment in super long debt in the second half while Nippon Life plans to modestly increase their JGB holdings.

Still, others showed caution with the BOJ expected to remain committed to easing for the foreseeable future. The 30-year JGB yield is still less than half of what it offered before the central bank embarked on its latest easing scheme more than five years ago.

“Although JGB yields rose slightly after the BOJ’s move, that has not had an impact big enough to change our stance,” said Hitoshi Maegawa, head of investment planning at Mitsui Life Insurance.

Reporting by Daniel Leussink, Hideyuki Sano, Shinichi Saoshiro, Ayai Tomisawa, Tomo Uetake and Taiga Uranaka in TOKYO Writing by Shinichi Saoshiro; Editing by Sam Holmes

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