Sumitomo Life to increase U.S. corporate bond investment

[October 24, 2017]   By Taiga Uranaka

TOKYO (Reuters) - Japan's Sumitomo Life Insurance Co said it would boost investment in U.S. corporate bonds in October-March, as Japan's fourth-largest private sector life insurer by assets continues to curb buying of Japanese government bonds (JGBs).

With about $3.12 trillion in total investment assets, Japan's life insurers have been among the biggest buyers of JGBs and other domestic debt securities, as they need to secure stable coupon income to pay insurance policy holders.

But they have also been under pressure to look for new investment assets, such as foreign corporate bonds, after the Bank of Japan's massive stimulus measures introduced in April 2013 pushed down yields on JGBs.

"Tough environment will continue, as we expect domestic interest rates to remain low," Iwao Matsumoto, general manager of Sumitomo's investment planning said at the company's biannual investment strategy briefing on Tuesday.

"We need to shift money to overseas assets."

Sumitomo had about 30 trillion yen ($267.4 billion) in investment portfolio as of end-September, with domestic bonds accounting for a little over 40 percent. Foreign bonds made up about 30 percent.

Yields on 20-year JGBs, the tenor of choice for life insurers, have stayed around 0.6 percent in recent months, even as they had moved comfortably above 1.5 percent before the BOJ's monetary easing.

Matsumoto said Sumitomo is investing in U.S. corporate bonds as returns from U.S. Treasuries are paltry after costs to hedge against currency swings.

U.S. corporate bonds are seen as having higher default risks than government debt, ensuring that investors can demand higher returns.

"Those with single A credit rating have yields about 1 percent higher than those on the U.S. government bonds. We can gain returns of about 1 percent even when the currency hedging costs 2 percent," Matsumoto said.

Sumitomo will also buy corporate bonds in Europe and Australia, he said.

The insurer said it will buy foreign bonds without currency hedging when the dollar falls against the yen.

Japanese insurers resort to currency hedging on the bulk of their foreign investments to protect their yen-denominated value.

In the first half ended September, Sumitomo Life said it increased holdings of foreign bonds by 640 billion yen, while those of domestic bonds grew by 90 billion yen.

(Reporting by Taiga Uranaka; Editing by Chang-Ran Kim and Biju Dwarakanath)

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