(Bloomberg) — A Japanese insurer with $65 billion in assets plans to unload all of its holdings of currency-hedged foreign debt, heralding what could become a renewed wave of selling by some of the largest investors in global bond markets.
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Fukoku Mutual Life Insurance Co. is one of the first life insurance companies in Japan to formulate investment strategies for the fiscal year. With combined assets of $2.9 trillion, the industry has long been a major force in offshore markets but has slumped in the past year as hedging costs erased the yield premium on overseas debt, and expectations mounted for the end of the radical Bank of Japan. loose monetary policy.
The privately held company, which has assets of 8.8 trillion yen ($65 billion), will reduce its holdings of foreign debt by 300 billion yen in the fiscal year that began April 1, said Yoshiyuki Suzuki, CEO and head of investment planning. The downgrade would wipe out all of the remaining 240 billion yen of foreign hedged securities.
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Rising dollar hedging costs in the past year for Japanese investors have eroded most, if not all, of the returns they get on foreign sovereign debt. The 10-year Treasury note yielding 3.6% has a negative yield with hedging costs now at more than 5%. This makes even low-yielding domestic debt attractive.
“The situation may be different if we expect hedging costs to fall in the near term,” said Suzuki. While a rate cut in the US will lower costs, “a cut is unlikely this fiscal year although Fed tightening will likely end soon.”
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Instead, he said, the insurance company will invest 320 billion yen in Japanese debt, of which 270 billion yen is in sovereign bonds and 50 billion yen in corporate paper.
Suzuki’s comments provide an early glimpse into the mentality of Japanese life insurers, which sold a record amount of foreign bonds in the previous fiscal year. Big investors in anything from Treasuries to Brazilian debt, their decisions will shed light on how they frame a potential BoJ policy adjustment that could reverse years of capital outflows.
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Suzuki said the BoJ may remove yield curve control in the current fiscal year. “My personal guess is that he might abolish the House Board early with the potential for a surprise in terms of timing.”
Fukuoka expects Japan’s benchmark 10-year sovereign bond to yield 0.8% at the end of this fiscal year, above the Bank of Japan’s 0.5% ceiling. The yield on the 20-year Japanese government bond is likely to be at 1.6%, up from the current 1.095%.
“Yields on the inside are likely to pick up a bit from here, and we’ll continue to invest with yields at the current level,” said Suzuki. For 20- and 30-year returns, just over 1% is an acceptable level to buy.
Fukuoka cut a record 650 billion yen in foreign bond holdings in the fiscal year ending in March. It added a record 470 billion yen of domestic debt in the same period.
It also expects the dollar to fall to 125 yen by March 31, while forecasting the 10-year Treasury yield at around 3.4%. The Japanese currency settled near 134.50 per dollar on Tuesday morning.
– With the help of Masaki Kondo.
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