April 25, 2018 / 7:08 AM / 3 months ago

UPDATE 1-Sumitomo Life: to increase investment in non-dollar foreign bonds

(Adds information and background)

By Taiga Uranaka

TOKYO, April 25 (Reuters) - Sumitomo Life Insurance Co said on Wednesday it plans to increase investment in foreign bonds denominated in currencies other than the U.S. dollar for the year started this month, given the rise in the cost of hedging the greenback’s swings against the yen.

Japanese insurers typically hedge currency risks when they make foreign bond investment, as sharp falls in dollar and euro diminish gains when converted back to yen.

The three-month hedging costs for dollar/yen is on the rise due to an increase in U.S. interest rates. They are at around 250 basis points currently, compared with 153.18 at the end of March last year, Reuters calculation shows.

“We cannot secure returns from U.S. and German government bonds after hedging costs,” Iwao Matsumoto, Sumitomo Life’s senior executive officer, said at a semiannual media briefing on investment strategy.

Sumitomo Life is Japan’s fourth-largest private sector life insurer, which manages about 30 trillion yen ($275 billion) in assets.

He said the insurer is shifting its foreign sovereign debt investment to French and other euro-zone government bonds, which generate enough returns since, contrary to the dollar, those who buy euro/yen hedges receive money from the counterparty.

Hedging costs are determined by a gap between two currencies’ short-term interest rates as well as investor demand for them.

To cope with the rise in the dollar hedging costs, Matsumoto also said the insurer will increase holdings of credit assets, or those with default risks, such as corporate bonds, as they have enough spreads over risk-free rates of U.S. Treasuries and other sovereign debt.

In addition, the insurer said it will buy U.S. bonds without currency hedges when the dollar falls sharply against the yen, a move that would generate extra gains when the U.S. currency rebounds.

Sumitomo Life and other Japanese life insurers, which manage combined $3.2 trillion in assets, are among the most affected by the Bank of Japan’s massive stimulus started in April 2013.

Yields on 20-year and 30-year JGBs , tenors of choice for life insurers, have fallen below 1 percent, making it difficult for insurers to meet obligations to policy holders.

That has prompted hunt for yield overseas. Sumitomo Life’s holdings of foreign currency-denominated bonds stood at about 7.1 trillion yen at the end of September last year, up from 3.5 trillion yen at the end of March 2013.

Sumitomo Life said it would continue to curb investment in super-long Japanese government bonds for the current financial year. ($1 = 109.0900 yen)

Reporting by Taiga Uranaka Additional reporting by Yoshiko Mori; Editing by Chris Gallagher and Amrutha Gayathri

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