Executives at Japan’s top four insurers, which manage more than $1.6 trillion in assets, told Reuters U.S. bonds are becoming attractive at yields near 2%.
A return of the long-term investors could help stabilise a market facing pressure from upbeat economic sentiment and concerns about inflation.
Sharp rises in U.S. bond yields on hopes of economic normalisation are prompting the institutional investors to look again at the market after shunning it for months. The 10-year U.S. Treasury yield rose to a 14-month high of 1.776% earlier this week from around 0.90% in December.
The insurers expect the 10-year Treasury yield to test 2% in the coming months.
“U.S. vaccination has progressed faster than expected, and the U.S. economy is recovering faster than Japan and Europe,” said Kenjiro Okazaki, general manager of global fixed income investment at Dai-ichi Life Insurance.
“We’ve been thinking Treasury yields would gradually rise but its pace surprised us. We now think the 10-year yield could top 2% as early as April-June.”
Japanese life insurers have been selling foreign bonds for eight months since July, their longest net-selling streak since the Ministry of Finance started compiling the data in 2005, mostly shifting to domestic bonds.
The U.S. dollar accounts for almost two-thirds of the top-four Japanese insurers’ foreign currency assets. They allocate 40-50% of funds to domestic bonds and 18-30% to foreign bonds. HEDGING
Japanese investors hedge against currency swings on a big portion of their foreign bonds, a strategy that is becoming more attractive now.
The cost of dollar hedges, tied to short-term U.S interest rates, is expected to remain low as the U.S. Federal Reserve has pledged to keep them near zero through 2023.
Yen-hedged 10-year Treasuries now yield 1.28%, compared with around 0.25% in December.
“The attraction of currency-hedged foreign bonds has risen as a U.S. rate hike is not on the radar. FX-hedged Treasuries are attractive now,” said Toshio Fujimura, general manager of investment planning at Sumitomo Life Insurance.
But Meiji Yasuda Life Insurance said it could reduce its currency hedging.
“Buying long-dated U.S. bonds without currency hedge is an option as the dollar could gain against the yen as the long-term bond yield gap between the two countries widens,” said Kenichiro Kitamura, an investment manager at the firm.
The dollar rose to a one-year high of 110.97 yen on Wednesday.
For some, current U.S. Treasuries yields were still not attractive enough.
“Considering U.S. 10-year yields were mostly above 2% before the pandemic, we don’t find the current level of returns from yen-hedged Treasuries attractive,” said Shinichi Okamoto, executive officer of finance and investment planning at Nippon Life.
The industry leader, like most other insurers, says it focuses on credit products, or non-government bonds that carry larger default risk but higher yields.
Japanese insurers remained wary of emerging markets.
“Emerging markets are good when the world economy is doing well. But we’ve often seen them suffer from capital outflows when only the U.S. economy is doing well and U.S. yields are high, just like now,” said Dai-ichi’s Okazaki.
Toshinobu Chiba, chief fixed income portfolio manager at Nissay Asset Management, a subsidiary of Nippon Life, said: “If 10-year Treasury yields rise above 1.8%, that would also be a signal to reduce exposure to emerging market debt.”
($1 = 110.62 yen) Reporting by Hideyuki Sano and Tomo Uetake; Additional reporting by Stanley White; Editing by Muralikumar Anantharaman