Japanese life insurers hold out for better bond yields
Japan's leading life insurers are accelerating their purchases of 30-year "superlong" Japanese government bonds (JGBs) as yields surpass the pivotal 2% mark, yet they remain cautious, anticipating higher yields later in 2024.
“Japanese life insurers are seeking even higher yields from JGBs. They have already reduced ALM [asset and liability] risks, or interest rate risk, substantially during the last few years, so they do not need to rush in terms of further accumulating superlong JGBs anytime soon,” Teruki Morinaga, director of insurance at Fitch Ratings Japan, told AsianInvestor.
The Bank of Japan’s end of negative rates in March had led to an improvement in the investing environment, some major life insurers said in media briefings April 24.
Japan’s largest life insurer, Nippon Life, plans to buy super-long Japanese government bonds and will accelerate purchases when the 30-year yield rises significantly above 2%.
“We are steadily buying 30-year securities as they are becoming attractive,” Akira Tsuzuki, executive officer of the company’s finance and investment planning department, said at a media briefing.
On May 13, the yield on superlong JGBs, a key focus for life insurers, surpassed the 2% milestone, reaching 2.04% by May 14—the highest in 13 years since May 2011. This yield now exceeds the major insurers' average liability cost of 1.8%.
Dai-ichi Life said in their media briefing that the company would prefer to wait until the yield exceeded 2%.
WAITING GAME
Despite the recent increase in yields, most life insurers anticipate that the Bank of Japan (BOJ) will hike policy rates once more before the year ends. They believe this will further elevate the yields on JGBs, justifying their decision to wait given their significant investments in recent years
“We bought enough super-long JGBs to meet the regulatory requirements over the past 3-4 years. Now we can make investment decision solely based on the attractiveness of the yield," Nippon Life’s Tsuzuki said.
Meiji Yasuda Life, Sumitomo Life and Japan Post Insurance also announced similar shifts to buying based purely on investment value rather than for compliance purposes.
“Although their long-term strategic asset allocation focuses on investing in superlong JGBs remains unchanged, they are tactically slowing the pace of such investments until interest rates further increase,” Soichiro Makimoto, vice president and senior analyst at Moody’s Ratings in Japan, told AsianInvestor.
According to Fitch Ratings Japan, the allocation to JGBs increased from 33% at the end of March 2021 to 37% by the end of March 2023, as revealed by the most recent public data. Morinaga anticipates that this allocation remained relatively stable throughout the fiscal year ending in March 2024 (FY2023).
Meiji Yasuda Life forecasts that the superlong JGBs yield will climb to 2.1%-2.2% in the current fiscal year through March 2025 (FY2024), as the bond market prices in another rate hike.
LIMITED OPTIONS
Still, market participants predict the yield rise could slow down somewhat now that it has surpassed 2%, a direct consequence of rising demand for the superlong JGBs among life insurers.
“We expect insurers’ investments in superlong JGBs to increase during fiscal 2024 if interest rates rise, a credit positive because it will help reduce the negative duration gap between their assets and liabilities,” Makimoto said.
In case of a yield slowdown, life insurers might eventually have to settle with the yields they can get rather than wish for even better yields.One reason is a lack of alternative assets to invest in, namely overseas government bonds.
“It is not very good timing to be aggressively accumulating foreign bonds because hedging cost remains high, there is the Japanese yen’s appreciation risk in the near future partly because of the recent rapid yen depreciation, and foreign bond markets are likely to remain volatile,” Morinaga said.
Some of the insurers will tactically purchase more unhedged foreign sovereign bonds in fiscal 2024, anticipating that the currency rate will not materially shift in an adverse direction, Makimoto pointed out.
“The benefit of such bond investments is higher coupon gains than from Japanese sovereign bonds, despite currency risks,” he added.
Life insurers’ allocation to foreign bonds decreased to 17% at end March 2023 from 22% at end March 2021. Morinaga expected that the numbers from the FY2023 ending March 2024 would not be significantly changed.
“What I have heard so far is that some major Japanese insurers are seeking the timing of buying more foreign credit products, such as US corporate bonds of A category or BBB category, to seek decent ‘credit spread’ even after considering high currency hedging costs,” Morinaga said.