April 21, 2017 / 5:12 AM / in 10 months

Japan's Taiyo Life to increase foreign bond investment with focus on corporate debt

TOKYO (Reuters) - Japan’s Taiyo Life Insurance plans to continue increasing its foreign bond holdings this financial year with a focus on corporate debt, a senior official told Reuters on Friday.

Taiyo Life is a unit of T&D Holdings (8795.T) with about 7.3 trillion yen ($66.9 billion) in assets.

“We look to slightly increase our foreign bond holdings, with an emphasis on corporate debt,” said Takeshi Negama, general manager at Taiyo Life’s investment planning department.

Faced with low domestic yields driven down by the Bank of Japan’s extensive monetary easing, Japanese insurers have increasingly sought better returns abroad.

Foreign government debt, notably Treasuries, have been a staple for Japanese investors. But the spike in U.S. yields to two-year highs that followed Donald Trump’s presidential election win in November has thrown a curve ball at investors.

“Before Trump won the elections, we thought a decline in U.S. yields was a possibility,” Negama said, adding that the surge in yields after Trump’s win had reduced unrealized gains from their holdings of Treasuries.

Taiyo Life said it trimmed its exposure to Treasuries during the previous financial year that ended on March 31.

The insurer holds roughly a quarter of its assets in foreign bonds, of which Treasuries make up about half with the rest consisting mostly of euro zone and Australian sovereign debt.

“Treasuries are still a big portion of our holdings. But we bought investment grade U.S. corporate bonds and supranational bonds last financial year,” Negama said.

The insurer plans to slightly increase its foreign currency exposure this financial year by expanding its unhedged foreign bond investment.

Holding unhedged foreign bonds is a cheaper alternative to currency hedging, which is more expensive but protects an investor from potentially unfavorable foreign exchange risks.

    Taiyo Life expects the yen to weaken against the dollar this financial year, with higher yields favoring the U.S. currency. It sees dollar/yen moving between 100 and 125 yen this financial year and forecasts the U.S. 10-year yield US10YT=RR, at 2.25 percent on Friday, to move in a range of 1.8 to 3.2 percent.

    The dollar weakened to a five-month low near 108.00 yen this week as geopolitical risks boosted the safe-haven Japanese currency, but Negama did not see the yen staying strong indefinitely.

    “We do not expect a strong yen trend to form from geopolitical events. For example, we see tensions in Syria being contained within the region and not harming the U.S. and European economies,” he said.

    Taiyo Life will keep their yen bond holdings steady this financial year, hoping to buy domestic bonds if their yields rise.

    While giving credit to the BOJ’s bid to control the domestic yield curve in an attempt to reverse some of the extreme flattening seen earlier, Negama said that, as investors, higher yields were still desired.

    “We would like the BOJ to eventually begin tapering its easy policy just as the Federal Reserve has managed to do,” he said.

    Japan’s benchmark 10-year yield JP10YTN=JBTC slid to a five-month low of zero percent earlier this week.

    Editing by Jacqueline Wong

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