Japan’s largest insurer may rejig its portfolio in favor of domestic bonds after a policy move by the central bank bolstered the debt’s appeal.
(Bloomberg) — Japan’s largest insurer may rejig its portfolio in favor of domestic bonds after a policy move by the central bank bolstered the debt’s appeal.
Nippon Life Insurance Co. is considering buying more Japanese bonds as yields have climbed to relatively attractive levels, said Akira Tsuzuki, senior general manager of investment planning at the firm. Benchmark 10-year sovereign yields have almost doubled to 0.48% after policy makers raised the cap to 0.50% on Tuesday.
“It will take a bit more time for markets to digest the BOJ’s move and to figure out how far interest rates will rise,” Tsuzuki said in an interview. “But in terms of yield levels, 1.5% on 30-year bonds is more investable than the past few years. If it is rising to 1.5% to 2.0%, that will be quite a favorable environment.”
The Bank of Japan’s surprise policy move has triggered a rush among investors to recalibrate their holdings as the nation’s bond yields jumped, stocks sank and the yen rallied. The rise in domestic yields may be a godsend for Japanese funds given that exorbitant hedging costs have made investments in foreign bonds unattractive.
The cost that Japanese investors incur to hedge against a weak dollar for three months stands at 4.9%, about 120 basis points higher than the Treasury 10-year yield. Money managers in the Asian nation offloaded a record $126 billion of US sovereign bonds this year as hedging costs climbed.
“It makes no economic sense to buy Treasuries when currency hedging costs exceed their yield,” Tsuzuki said, adding that Nippon Life will continue to look for opportunities in higher-yielding credit products for portfolio diversification.
Treasuries Bulls Find No Solace in Tepid Demand From Japan Funds
He, however, does not expect the BOJ to take further policy action next year as global growth is likely to slow and the Federal Reserve may stop raising interest rates in early 2023.
Nippon Life, which oversees the equivalent of $573 billion, will be reviewing its yen projections following the BOJ’s move, according to Tsuzuki. In October, the firm forecast that the dollar would trade between 131 and 159 yen.
“We expect the yen to strengthen toward next year,” Tsuzuki said. “It will be difficult for us to buy foreign bonds without currency hedging until we can see a better level.”
–With assistance from Masaki Kondo.
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