Nippon Life to target foreign bonds without currency hedging, FX-hedged credits

SYDNEY, April 23 (Reuters) - Nippon Life Insurance Co plans to boost its holdings of foreign bonds without currency hedging and FX-hedged credit products in the United States and Europe in the current fiscal year to March, a senior company official said on Thursday.

The largest private insurer in Japan intends to accelerate its shift towards higher-yielding corporate bonds and project finance in foreign debt holdings, to make up for declining global interest rates and the subsequent search for yield.

At the same time, the company plans to reduce its holdings of currency-hedged foreign debt, namely U.S. Treasuries and European sovereign bonds, Shinichi Okamoto, executive officer of finance and investment planning said in an online briefing.

Currency-hedged foreign bond investments have long been popular among Japanese investors for years, but the rising cost of the dollar hedge has made that strategy increasingly unattractive as yields on government bonds have declined.

The cost of a three-month hedge stands at 0.8%, above the 10-year U.S. Treasury yield of 0.6% on Thursday, forcing yen-based investors to shift riskier corporate bonds.

Nippon Life said it expects the dollar to move between 100 and 120 yen through March 2021, perhaps a shade higher, but not much different from the current level of 107.75 yen.

“We cannot give any specific level for us to buy the dollar as we need to take other factors, such as hedging costs and interest rate levels, into account to make such decisions,” Okamoto told Reuters in emailed comments.

Following a market meltdown caused by the coronavirus pandemic, Nippon Life’s unrealised gains from its domestic stock portfolio sank to a six-year low of 3.17 trillion yen ($29.4 billion) by the end of March.

However, the company intends to maintain its equity portfolio steady in the current financial year at least for now.

“It is unclear yet how much, and how long, the coronavirus pandemic will end up damaging the global economy and markets. So we will keep a close eye on risk assets and play it by ear,” Okamoto added.

Elsewhere, Nippon Life plans to increase its holdings of domestic bonds and use of yen interest rate derivatives, including exotic ones, in the year through March.

The insurance giant, however, showed only lukewarm interest in the Japanese government bonds (JGBs).

“JGBs are not attractive unless the 30-year yield rises to near 1.0%,” Okamoto said.

The 30-year yield last quoted at 0.44%.

Nippon Life’s total assets stood at 70.8 trillion yen as of December. ($1 = 107.75 yen) (Reporting by Tomo Uetake; editing by Richard Pullin)