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 towardsTreasuries
* Demand for JGBs still low, but bump up in yields stirsinterest
* For individual reports on each insurer, click
* Table of the insurers' investment plans
By Shinichi Saoshiro
TOKYO, Oct 26 (Reuters) - Japanese life insurers are poisedto buy more foreign bonds in the second half of the currentfiscal year, but high currency hedging costs have stifled theirdemand for U.S. Treasuries.
Most of the country's nine largest private life insurersplan to keep raising their foreign bond holdings in the secondhalf of the fiscal year ending March 2019, according tosummaries of investment plans obtained by Reuters in interviewsand at news conferences this month.
Seeking better returns, Japan's life insurers have steadilydiversified their portfolios into foreign bonds over past yearsas domestic debt yields declined under extremely low centralbank interest rates.
But the cost of protecting dollar-denominated debt - theirmain foreign bond investments - against foreign exchange ratefluctuations has increased along with rising U.S. yields andstrong funding demand for the greenback, nudging investors awayfrom Treasuries.
Nippon Life Insurance plans to shift their currency-hedgedholdings towards U.S. credit products, as well as Europeansovereign and corporate bonds, while reducing Treasuries andmortgage-backed securities.
Taiyo Life Insurance said their dollar-denominated debtpurchases in the first half of the fiscal year consisted ofassets that offer a certain spread above Treasuries, such ascorporate bonds, "Ginnie Mae" agency bonds issued by the U.S.Government National Mortgage Association (GNMA) and dollar bondsJapanese state agencies issue.
"We will keep increasing foreign bond holdings in the secondhalf, centred on dollar-denominated instruments. But we did notpurchase U.S. Treasuries in the first half, and we don't plan onbuying them in the second half because of rising hedge costs,"said Masanori Nakamura, general manager at the investmentplanning department of Taiyo Life.
Recent U.S. Treasury Department data underlined such astance towards U.S. government debt, with Treasuries held byJapanese investors dropping in August to $1.029 trillion, thelowest since October 2011.
On the other hand, Japanese investor demand for U.S. debtthat provides higher returns relative to Treasuries hasincreased.
Gross Japanese purchases of dollar-denominated bonds issuedby U.S. government corporations, federally sponsored agenciesand corporations have risen steadily, according to data from theTreasury International Capital System (TIC).
High currency hedging costs have also prompted a movetowards unhedged foreign bonds.
Insurers such as Dai-ichi Life Insurance and MeijiYasuda Life Insurance said they will look to buy unhedgedforeign debt in the second half during bouts of yenappreciation.
JGB DEMAND SUBDUED, HIGHER YIELDS STIR INTEREST
While insurers' overall demand for Japanese government bondsremains subdued, the increase in currency hedging costs coupledwith a recent rise in longer-dated yields has stirred interestin domestic debt.
Yields rose after the Bank of Japan in July said it wouldallow the benchmark interest rate it guides under its yieldcurve-control scheme to move in a wider range, a change that wasperceived by some investors as a small step towards policynormalisation.
As a result the "super long" 30-year JGB yield climbed to 0.950 percent early in October, itshighest since February 2016, from a 1-1/2-year low of 0.665percent set in July.
In light of the rise in yields, Fukoku Mutual Life Insurancesaid it would not rule out investment in super long debt in thesecond half while Nippon Life plans to modestly increase theirJGB holdings.
Still, others showed caution with the BOJ expected to remaincommitted to easing for the foreseeable future. The 30-year JGByield is still less than half of what it offered before thecentral bank embarked on its latest easing scheme more than fiveyears 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 LifeInsurance.
(Reporting by Daniel Leussink, Hideyuki Sano, ShinichiSaoshiro, Ayai Tomisawa, Tomo Uetake and Taiga Uranaka in TOKYOWriting by Shinichi Saoshiro; Editing by Sam Holmes)
shinichi.saoshiro.reuters.com@reuters.net+813-6441-1774)) Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.  |