TOKYO Big Japanese life insurers, who are major bond investors globally, are primarily focusing on U.S. bonds while staying cautious on European bonds, earning reports and comments from industry executives show.
U.S. bonds have become more attractive as some Japanese insurers have been able to earn extra income by lending these to Japanese banks, which in turn use Treasuries as collateral to raise dollars in repo markets.
Nippon Life [NPNLI.UL], Dai-ichi Life (8750.T), Meiji Yasuda Life [MEIJY.UL], Sumitomo Life [SMTLI.UL] and formerly state-owned Japan Post Insurance (7181.T) collectively manage more than $2 trillion of financial assets.
Earnings disclosures published in the past two weeks showed U.S. bonds accounted for a large part of the increase in their foreign bond holdings during the financial year that ended on March 31.
The five insurers increased foreign bond holdings by a combined 6.3 trillion yen ($56 billion). Of the total, they increased dollar bonds by 4.8 trillion yen ($43 billion), to 26.8 trillion yen.
Euro bond ownership increased at only one-tenth the pace that U.S. bonds did. Euro bonds rose 488 billion yen (3.9 billion euros), with outstanding in March 2017 at 7.0 trillion yen.
In early 2016, French bonds were popular among Japanese investors, especially banks. But early this year, worries about the coming presidential election triggered a sell-off in French paper bonds, causing big losses among investors.
Motohiko Sato, manager of investment planning at Meiji Yasuda Life, said his firm will continue to invest largely in U.S. bonds because French bond yields are not attractive.
To be sure, investors also suffered losses on U.S. bonds when Donald Trump’s surprise victory in November’s presidential election sparked a sell-off. But the subsequent recovery in U.S. bond prices has helped whet appetites.
While Japanese insurers getting extra income by lending U.S. Treasuries to Japanese banks is not new, it used to involve only small amounts and short periods such as overnight.
“Our lending has already reached to several hundred billion yen. We may consider increasing the amount further in the future,” said Ryosuke Fukushima, general manager of investment planning at Japan Post Insurance.
Japanese banks, which are constantly short of dollars, benefit from this because they can re-cycle the Treasuries to borrow dollars in the U.S. repo market at costs lower than those in the traditional dollar/yen swap market.
The dollar/yen basis swap spread, or the costs of swapping yen to dollar, rose sharply in 2016 because of ballooning dollar financing needs of Japanese banks, which sharply stepped up lending and investment overseas in recent years.
The three-month basis swap spread JPYCBS=TKFX rose to almost 1.0 percent in November, meaning Japanese borrowers need to pay extra one percentage point on top of the benchmark interest rate to borrow dollars while using yen as collateral.
The three-month spread has shrunk to around 0.3-0.4 percentage point in the past month, the lowest level in more than a year.
While there are a few reasons behind the fall in the spread, such as reduced foreign bond buying by Japanese investors and increased dollar funding through deposits by Japanese banks, some market players say insurers’ lending also played a role in narrowing the gap.
A lower spread reduces the cost of currency hedging when Japanese investors make foreign bond investments, thus bringing additional benefits to Japanese investors.
“It is a win-win situation for both U.S. Treasuries’ lenders and borrowers. And if the hedge cost falls, that is even better,” Fukushima said.
($1 = 111.77 yen)
(1 euro = 124.90 yen)
(Writing and additional reporting by Hideyuki Sano; Editing by Richard Borsuk)