Yen surge ends US$353b insurer's wait to buy US bonds

[TOKYO] Meiji Yasuda Life Insurance is boosting purchases of unhedged US debt, encouraged by the yen's strong start to 2018 and rising yields.

"The time for unhedged buying has finally come," Shinji Inoue, a manager of investment planning department at Meiji Yasuda, which oversaw the equivalent of US$353 billion in total assets as of December, said in an interview.

"We were at our wit's end until the third quarter with a sheer lack of volatility. I'm glad we've endured. The environment now is easier to invest in foreign bonds."

The recent advance in US yields is boosting their appeal for Japanese insurers by providing some cushion against rising hedging costs. The 10-year Treasury yield hit a four-year high of 2.94 per cent last week and Goldman Sachs Asset Management predicts a rise to as high as 3.5 per cent in six months as the market prices in a steeper pace of Federal Reserve tightening.

Japanese life insurance companies bought a net 1.05 trillion yen (S$12.92 billion) in overseas debt last month, the most since August 2016, according to data from the Ministry of Finance.

The yen climbed to 105.55 per US dollar last week, its highest level since November 2016, as a global stock rout spurred demand for haven assets. It traded 0.4 per cent weaker at 107.73 as of 3.45pm in Tokyo, with its 4.6 per cent rise this year being the biggest among major currencies.

Meiji Yasuda started adding to such holdings in late January, just as the dollar-yen broke below the 110-level for the first time in four months, according to Mr Inoue.

Of its around 5 trillion yen in outstanding foreign-bond holdings as of December, the proportion of hedged and unhedged securities was about equal.

The insurer plans to spend "a couple of 100 billions of yen" more buying unhedged US dollar bonds, Mr Inoue said.

While there's a "good chance" of a drop in the US dollar-yen to 105, Inoue said he doesn't expect it to fall below 100. The insurer continues to see a "moderate uptrend" for the pair in the year starting April 1.

US debt continues to be the focus for Meiji Yasuda. It is mostly buying Ginnie Mae mortgage-backed debt with maturities around five years, while also investing in US credit products, Inoue said.

The 10-year yield's rise toward 3 per cent has drawn the insurer back to Treasuries after it held off purchases between April and December.

"We saw the 10-year yield below 2.5 per cent as too low" taking hedging costs into consideration, he said.

"Yields around 2.7 to 2.8 per cent are fine. US yields are considerably higher than those of other major countries, which is attractive. We don't plan to change our view."

BLOOMBERG