MNI: Japan Sumitomo Life To Up Unhedged Foreign Bonds in FY23

Japan's Sumitomo Life Insurance company plans to increase the balance of unhedged foreign bond holdings by several hundreds of billion yen this fiscal year, after reducing its balance last fiscal year, the company’s chief fund manager said on Wednesday, adding changes to the YCC will likely occur in H2 of the fiscal year.

The company will focus mainly on high interest rate U.S. Treasuries, while paying attention to foreign exchange rate moves and will consider hedging to reduce the risk of a rapid rise in the yen, Mitsuo Masuda, general manager of Investment Planning Department at Sumitomo Life, told reporters.

The company expects the balance of hedged foreign bond and domestic bond holdings to fall this fiscal year due to sales and redemptions of those bonds, but it will increase investment in 30-year Japanese government bonds. “We plan to buy super long-term JGBs constantly but will accelerate the pace of buying those bonds when interest rates are in a process of rising,” Masuda said, adding that if the 30-year JGB yield rises to the latter half of 1%, the company will increase additional investment in 30-year bonds.

The company expects the 30-year JGB yield to move in a range of 1.10% to 2.00% this fiscal year with trading at 1.40% at the end of March. Masuda expects the 10-year JGB yield to move in a range of zero to 1.05% this fiscal year with trading at 0.60% at the end of March. He said the zero percent that the company expects is based on the risk that the U.S. economy falls into serious recession, which in turn will sharply lower global interest rates.

The balance of domestic bond holding rose by JPY600 billion to JPY14.97 trillion at the end of March and the company lowered the balance of foreign bonds by JPY1.99 to JPY8.37 trillion. “The Bank of Japan will continue its easy policy but the bank will likely adjust yield curve control or scrap YCC for the first half of this fiscal year, possibly as early as June,” Masuda said.

FOREIGN BONDS

As for foreign bond investments, Sumitomo Life will consider buying foreign-denominated currency floating assets, which are not influenced by hedging costs, and hedged corporate bonds, mainly in the U.S., which offer higher return than hedging costs.

Masuda said that the company lowered the balance of hedged foreign-bond holding sharply last fiscal year as hedging costs had risen due to the U.S. Federal Reserve's rate hikes.

The company will continue to reduce the balance of hedged foreign-bond balance as it expects hedging costs to stay at high levels, Masuda said. He expects the Fed to lower the federal funds rate over January-March 2024 after pausing its rate hike in or after May.

Sumitomo expects the U.S. Treasury 10-year yield to move in a range of 2.50% to 4.50% and trade at 3.25% at the end of March. The company expects the dollar to trade between JPY115 and JPY140 and the euro to move in a range of JPY120 to JPY155 this fiscal year.

At the end of March, Sumitomo Life's assets are estimated at JPY34.68 trillion, down JPY500 billion from a year earlier at the end of March.