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Lifers Bet on Public Debt as Corporate Sales Flag: Japan Credit

Lifers Bet on Public Debt as Corporate Sales Flag
Nippon Life Insurance Co., right, Dai-ichi Life Insurance Co., left, Meiji Yasuda Life Insurance Co., second from right, and Sumitomo Life Insurance Co. are accumulating government bonds, after they bought about 3.1 trillion yen worth in the first half, according to Mizuho and Nomura. Photographers: Tomohiro Ohsumi and Haruyoshi Yamaguchi/Bloomberg

Japan’s life insurers are set to increase investments in government debt in the second half of the fiscal year that ends March 31, 2012, as corporate bond sales slump to the least in five years.

The nation’s top nine life insurers will probably buy about 1 trillion yen ($13 billion) of yen-denominated, mostly public, notes in the six months through March, according to Nomura Securities Co. and Mizuho Securities Co. A decline in sales has shrunk the extra yield investors demand to own Japanese corporate bonds, excluding power companies and banks, rather than government securities by five basis points to 22 as of Oct. 28, from a post-earthquake high of 27 on May 11, Bank of America Corp.’s Merrill Lynch Japan Industrial Index shows.

Nippon Life Insurance Co., Dai-ichi Life Insurance Co., Meiji Yasuda Life Insurance Co. and Sumitomo Life Insurance Co. are accumulating government bonds, after they bought about 3.1 trillion yen worth in the first half, according to Mizuho and Nomura. Sovereign debt purchases may help the government keep borrowing costs low as Prime Minister Yoshihiko Noda aims to revive the economy after three quarters of contraction and to rebuild after the March 11 temblor.

“With declining corporate bond sales, money will shift to sovereign debt,” said Akito Fukunaga, Tokyo-based chief rates strategist at the brokerage unit of Royal Bank of Scotland Group Plc. “Life insurers don’t have a choice but to buy longer-dated debt in the second half even if yields fall.”

Corporate Sales Slump

Sales of corporate securities fell to a five-year low of 7.14 trillion yen in the year through Oct. 28, down 8.6 percent from the same period a year ago, according to data compiled by Bloomberg. Companies have raised 995 billion yen this month, the data show.

Government bonds earned 2.3 percent in the fiscal first half ended Sept. 30, beating the 1.6 percent return by the index tracking Japanese companies, Merrill Lynch indexes show.

The yield premium on Japanese corporate debt widened to 45 basis points on Oct. 28 from 41 at the start of this month, paring declines from a peak of 78 reached June 27, Bank of America Merrill Lynch data show. The cost of insuring Japanese corporate debt against non-payment declined this month, with the Markit iTraxx Japan index of credit-default swaps dropping to 162.2 basis points at the end of last week from 202.5 on Sept. 30, CMA data show.

Europe Speculation

Contracts on Japanese government debt dropped 50.6 basis points this month as speculation Europe will resolve its debt crisis increased investors’ appetite for risk, closing at 96.4 on Oct. 28, according to data provider CMA, which is owned by CME Group Inc., and compiles prices quoted by dealers in the privately negotiated market.

Ten-year Japanese government bond yields rose to 1.045 percent this morning, the highest since Sept. 5, and 20-year yields advanced to 1.79 percent. The Ministry of Finance plans to sell 10-year bonds tomorrow. A sale of two-year securities on Oct. 26 saw the strongest demand since the July auction, based on so-called bid-to-cover ratios.

“The country’s fiscal situation is in a serious state,” Noda said in a speech after the Cabinet submitted to parliament a 12.1 trillion yen disaster aid package on Oct. 28.

Noda’s government decided to sell about 800 billion yen of additional bonds this fiscal year, announcing those plans on Oct. 21, to fund quake recovery and help companies cope with a strong yen amid the U.S. slowdown and Europe’s sovereign debt crisis.

Japan Intervenes

The government intervened in currency markets today to weaken the yen after it reached a postwar record of 75.35 versus the dollar. Japan’s currency sank more than 4 percent to 79.20 as of 12:09 p.m. in Tokyo after Finance Minister Jun Azumi ordered the unilateral move.

Corporate bond sales in Japan have declined as nuclear operators including Kansai Electric Power Co. pulled debt offerings after the March disaster triggered a meltdown at Tokyo Electric Power Co.’s Fukushima Dai-Ichi plant.

“Japanese government bonds will continue to be our main investments as corporate bond sales are on the decline because of the halt in utilities’ issuances,” said Yoshiteru Hata, deputy general manager of Sumitomo Life’s investment planning division. “We will be ready to buy 20-year bonds to some extent even at a yield of 1.7 percent.”

Nippon Life plans to invest about 400 billion yen in the second half with a focus on buying 20- and 30-year securities, according to Yosuke Matsunaga, general manager of the finance and investment planning department. It invested 1.3 trillion yen in the first half, with the majority in yen-denominated bonds, he said.

‘Difficult to Find’

“With a decline in utility bond sales, the reality is that it’s difficult to find investable corporate bonds of higher-rated companies,” Matsunaga said. As part of its effort to diversify its portfolio, Nippon Life has invested in corporate bonds of overseas firms by employing currency hedges, he said.

Japanese life insurers are buying longer-maturity debt for their so-called asset-liability management accounts, which aren’t valued according to daily market moves. Use of such accounts may help them prepare for changes to accounting rules that seek to align insurers’ risks with capital to offer more protection for policyholders.

Japan’s 47 life insurers managed 311 trillion yen in assets at the end of August, 0.7 percent more than a year earlier, according to the Life Insurance Association of Japan. Japanese government bonds accounted for 42.7 percent of that value, up from 23 percent five years ago. Corporate bonds made up 7.9 percent, while equities amounted to 4.3 percent, the data show. Overseas securities, including bonds, comprised 14.2 percent.

Longer Maturities

Dai-ichi Life will probably buy the same amount of yen-denominated bonds it purchased last year, said Takashi Iida, a manager in the investment planning division.

All insurers, combined, bought a net 5.4 trillion yen in Japanese bonds with maturities of more than 10 years in the fiscal first half, 4.9 percent more than the same period a year ago, according to data compiled by the Japan Securities Dealers Association. They were the country’s biggest buyers of so-called super-long securities in the period.

Many of the insurers are expecting to increase their holdings of foreign bonds in the second half as part of their efforts to diversify portfolios, Yasuhiro Sobue, a Tokyo-based analyst at Mizuho Securities, wrote in a report dated Oct. 27. Such investments may be limited after declines in overseas bond yields and increases for costs to hedge currency risks are limiting their attractiveness, he said.

Ten-year U.S. Treasury yields have dropped more than one percentage point since March 31.

Meiji Yasuda Life plans to boost yen-denominated bonds by about 2 trillion yen in the year to March, said Yasuharu Takamatsu, deputy president and head of investments. It will increase foreign bonds without currency hedges by about 30 billion yen and invest 90 billion yen in notes with such hedges.

“The yen is strengthening further, but investors’ risk appetite is declining,” said RBS’s Fukunaga. “The difference in returns on currency-hedged foreign bonds and JGBs is becoming insignificant, so it’s difficult to invest now.”

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