April 19, 2018 / 7:46 AM / 3 months ago

UPDATE 1-Japan's Mitsui Life to boost holdings of foreign bonds, credit products

* Plans to increase foreign bonds holdings by over $2.23 bln

* To raise investment in Japanese, foreign credit products

* To cut currency-hedged foreign bonds due to rising hedge costs (Adds comments, background, and details on Mitsui decision)

By Hideyuki Sano

TOKYO, April 19 (Reuters) - Japan’s Mitsui Life Insurance plans to increase foreign bond investments without currency hedging by more than 240 billion yen ($2.23 billion) in the current financial year to March 2019, a senior company official said on Thursday.

The firm also plans to increase investments in credit products, such as corporate bonds, in both Japanese and foreign markets, Hitoshi Maegawa, head of investment planning at Mitsui, told a news conference.

Mitsui Life plans to increase foreign bonds holdings due to brisk sales of products denominated in foreign currency, mostly the Australian dollar, he said.

In the year that ended on March 31, Mitsui increased the holding of foreign bonds without currency hedging by 240 billion yen, to match its rising sales of foreign currency products.

The investor expects its buying of foreign bonds to be bigger this financial year, Maegawa said, adding that the company could buy more U.S. dollar bonds, if the sales of dollar-denominated products increase.

In contrast, Mitsui has reduced currency-foreign bonds by 30 billion yen last financial year and it plans to cut them further this year because of the rise in dollar hedging costs, which are closely linked to U.S. short-term interest rates.

As the Federal Reserve has kept raising interest rates, the cost of hedging for dollar has risen to around 250 basis points, or 2.50 percentage points, having doubled in about two years.

That would eat up a large part of the income investors would earn from 10-year U.S. Treasuries, currently yielding about 2.85 percent.

To mitigate the impact of rising hedging costs, Mitsui plans to buy more credit products to enhance returns, rather than U.S. Treasuries.

“We mostly focus on investment grade assets. We could see their spreads widening. But we plan to hold them until maturity, allowing for widening spreads at certain phases,” Maegawa explained.

The company expects the growth in global economy to continue and stock prices to rise further, and anticipates that the Nikkei average will rise to 23,800 by next March from around 22,200 on Thursday.

Maegawa, however, added that financial markets are likely to be volatile.

“Since the start of this year, market volatilities have risen. I do think this year will see rises in volatilities every time a big incident happens,” he said, noting uncertainties on U.S. trade policy and geopolitical developments.

The investor also plans to start investment in alternative assets, with an eye on long-term assets, such as infrastructure funds.

$1 = 107.39 yen Reporting by Hideyuki Sano, Editing by Chang-Ran Kim and Sherry Jacob-Phillips

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