Wrapup 1: Japanese insurers cautious on foreign govt bonds, shrug off dollar rally

Japan Post Insurance

27/10/2021 09:39

* Some Japanese insurers turn more wary of foreign bonds' FX
risks
    * Most favour credit products due to low govt bond yield
    * Most plan to increase yen bonds due in part to regulation 
    * For table on each company's stance, see  urn:newsml:reuters.com:*:nL4N2RE1TT
    * For stories on individual companies, see  JP/INS 

    By Hideyuki Sano
    TOKYO, Oct 27 (Reuters) - Japanese insurers are growing
increasingly reluctant to buy foreign government bonds without a
currency hedge, as they are not expecting the recent dollar
rally against the yen to continue for much longer.
    Only two out of Japan's top 10 insurers said they planned to
increase foreign bonds without a currency hedge between October
and March while the others either planned to reduce their
overall holdings or keep them steady, according to insurers'
comments made at press conferences and to Reuters in October.
    U.S. dollar bonds make up the bulk of Japanese insurers'
foreign bond holdings.
    Many insurers also said they preferred investing in
corporate bonds, which offer higher returns than sovereign ones,
or in local yen bonds as they seek to meet regulatory
requirements.
    "We are cautious on unhedged foreign bonds. The yen has
already weakened considerably. We are not increasing their
holdings when the yen is at current levels," Hiroyuki Nomura,
head of investment planning at Japan Post Insurance  7181.T 
told reporters during a news conference on Wednesday.
    The dollar hit a four-year high against the Japanese
currency at 114.695 yen on Oct. 20, as rising U.S. inflation has
fuelled expectations of an earlier-than-expected Federal Reserve
rate hike, while the Bank of Japan looks poised to keep interest
rates low for some time. 
    A rising import bill, driven by soaring energy prices, has
also weighed on the yen in recent weeks, while the currency has
also come under pressure from slowing export growth, as
automakers curb production due to supply shortages.    
    Industry leader Nippon Life  NPNLI.UL  expects the dollar to
slip back to around 108 yen by March from 114 yen currently,
voicing scepticism on rising expectations of a U.S. rate hike
next year.
    Federal Reserve Chair Jerome Powell said last week the U.S.
central bank should start the process of reducing its support of
the economy by cutting back on its asset purchases, but should
not yet touch the interest rate dial.  urn:newsml:reuters.com:*:nL1N2RI1MV
    Fukoku Life  FKMLI.UL , which had a considerable exposure to
the dollar many years ago when it was way below 100 yen, will
take out currency hedges on all of its foreign bond investment
because it thinks the current dollar level is a bit expensive,
said the company's investment planning manager Yoshiyuki Suzuki.
    Japanese life insurers collectively manage 412 trillion yen
($3.61 trillion) of assets and have been big investors in
foreign bonds for years.
    But they became a net seller of foreign bonds in the
financial year to March 2021 for the first time in seven years,
after having purchased 20.5 trillion yen in the preceding six
years.
    
    STILL TOO LOW
    Many of Japan's top insurers said they have limited appetite
for foreign government bonds, even with currency hedges, given
the low returns on offer.
    Ten-year U.S. Treasury yields rose to a six-month high of
1.705%  US10YT=RR  last week on inflation worries but it is
still way below the 2-3% range seen between 2017 and 2019.
    Instead, most insurers are buying higher-yielding corporate
debt, even though the extra return they offer compared with
equivalent U.S. government bonds has fallen to near record lows.
    The credit spreads in U.S. bond markets have tightened
sharply since March last year to historically low levels.
    The yield spread on Bank of America's investment grade
corporate bond index  .MERC0A0  over Treasuries shrank to 1.07%
this week, the tightest spread since 2018, compared with a peak
of 4.28% in March 2020, at the height of the pandemic-driven
market troubles.
   "The global low interest rate environment will likely
continue, which means investors will have strong needs for yield
enhancement. So we feel demand for credit products will remain
strong," said Akifumi Kai, general manager of investment
planning at Dai-ichi Life  8750.T .
    Many Japanese insurers also plan to increase yen bonds, in
part to meet regulatory requirements before the introduction of
new solvency rules in 2025, even though the 10-year JGB yield
 JP10YTN=JBTC  is stuck near 0% due to the Bank of Japan's
policy to peg it around that level.
    ($1 = 114.00 yen)

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Japanese insurers' foreign bond buying    http://tmsnrt.rs/2oZOJ7E
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 (Reporting by Hideyuki Sano, additional reporting by Tomo
Uetake, Daiki Iga, Noriyuki Hirata, Hiroko Hamada, Mayu Sakoda
and Mariko Sakaguchi; Editing by Ana Nicolaci da Costa)
 ((hideyuki.sano@thomsonreuters.com; +81 3 4520 1195;
))