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TOKYO, Oct 29 (Reuters) - Nippon Life Insurance Co plans to increase its holdings of foreign bonds without currency hedging in the six months through March 2020, senior company officials said on Tuesday.
Nippon Life’s plan reflects the rising cost of dollar hedging as well as its view that the U.S. Federal Reserve’s precautionary rate cuts this year will gradually boost the U.S. economy and underpin the dollar.
“If markets go down in the current half year, we think it will be a good chance to buy on dips,” Shinichi Okamoto, senior general manager of finance and investment planning, told a news conference.
Japan’s largest private insurer said it expects the dollar to move between 95 and 115 yen through March, and may buy U.S. dollar bonds without currency hedging “if the dollar falls near 100 yen.” The dollar was trading around 108.98 yen on Tuesday.
Instead, Nippon Life plans to reduce its holdings of currency-hedged foreign debt.
Currency hedged foreign bond investments had been popular among Japanese investors for years, but rising costs of dollar hedging due to higher U.S. interest rates are making that strategy increasingly unattractive.
The cost of a three-month hedge stands at 2.60%, above the 10-year U.S. Treasury yield of 1.85%, forcing yen-based investors to buy riskier corporate debt.
Nippon Life plans to reduce holdings of U.S. Treasuries and add higher-yielding corporate bonds in the October-March period.
“We buy higher-quality, investment-grade bonds only,” said Okamoto. “While some signals indicate the U.S. credit market is overheating, there are no worrisome bubbles yet evident. With appropriate selection and monitoring, we think we can still earn decent returns from corporate bonds.”
The company plans to increase holdings of domestic bonds and use of yen interest rate derivatives, including exotic ones, in the six months through March.
Nippon Life, however, added that Japanese government bonds (JGBs) are not attractive unless the 30-year bond yield rises to 0.8-1.0%. The 30-year government debt yield stood at 0.420% on Tuesday.
Elsewhere, the firm plans to keep adding investments in alternative assets, including overseas real estate and infrastructure investments through funds.
Nippon Life’s total assets stood at 68.8 trillion yen ($630 billion) as of June 30.
$1 = 108.98 yen Reporting by Tomo Uetake; editing by Chang-Ran Kim and Jason Neely
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