Insurer JGB Addiction Spurs Best Rally Since 2011: Japan Credit

Life insurers preparing to boost domestic debt holdings look set to support the longest winning run for longer-dated Japanese government bonds in two years.

Companies from Nippon Life Insurance Co. to Meiji Yasuda Life Insurance Co. announced plans last week to boost yen debt in the second half started Oct. 1. That helped drive a 1.2 percent return in October for JGBs maturing in more than 10 years, a fourth monthly advance that’s the longest since September 2011, according to an index compiled by Bloomberg and the European Federation of Financial Analysts Societies. Similar-dated Treasuries are up 1.1 percent this month.

Sustained buying from domestic insurers, which hold about 20 percent of outstanding JGBs, will help the government maintain the world’s lowest borrowing costs on public debt that’s grown to more than 1 quadrillion yen ($10.2 trillion). The Bank of Japan announced today it will maintain record bond purchases that sent 20-year yields to a decade low of 1 percent in April. The yield has since climbed to 1.485 percent.

“Insurers have been waiting to buy long bonds in the second half with yields at reasonable levels,” said Tomohiro Miyasaka, the director for fixed-income strategy in Tokyo at Credit Suisse Group AG, one of the 23 primary dealers obliged to bid at Japan’s debt offerings. “Since they held back in the first half, they have more capacity and incentive to buy and shrink the duration gap of their assets and liabilities. Yields will remain capped.”

Super-Long JGBs

Life and casualty insurers bought a net 2.98 trillion yen of super-long term JGBs in the first half ended Sept. 30, the smallest amount in four years, according to the latest figures from the Japan Securities Dealers Association.

The sensitivity of life insurers’ liabilities to a change in interest rates, known as duration, is larger than that of their assets, according to the BOJ’s financial system report on Oct. 23. The difference in duration between their liabilities and assets was more than three years in fiscal 2012, the report showed.

The BOJ buys more than 7 trillion yen of JGBs every month to foster 2 percent inflation and 3 percent nominal growth. Yesterday it conducted its 10th purchase operation in October, offering to buy 1 trillion yen in the debt.

Central bank Governor Haruhiko Kuroda and his policy board forecast consumer prices excluding fresh food will climb 1.3 percent in the year starting April 2014, once effects of a planned sales-tax increase are stripped out. Inflation will reach 1.9 percent in fiscal 2015, they predicted. Those were in line with July estimates.

Core Prices

Government data showed on Oct. 25 that core prices rose 0.7 percent in September from a year ago, near the 0.8 percent increase in August that was the highest since November 2008.

Japan’s 10-year yield touched 0.585 percent today, the lowest since May 9, before trading unchanged at 0.59 percent, according to Japan Bond Trading Co. That compared with 2.53 percent for equivalent U.S. Treasuries. The benchmark JGB yield will remain at 0.96 percent or lower through the end of 2014, according to weighted-average forecast of analysts surveyed by Bloomberg.

Japan’s five-year breakeven rate, an indicator of inflation expectations that shows the difference between nominal bond yields and those on price-protected debt, has fallen from an all-time high of 1.89 percent on May 23 to 1.53 percent.

Ideal Yields

“Even though the base scenario is for life insurers to stick with Japanese bonds for asset-liability management reasons, low yields would post a big challenge for them,” said Naoaki Hotani, a financial analyst at Mizuho Securities Co., another primary dealer. “They ideally would like 1.7 percent for the 20-year yield, or at least 1.65 percent.”

Insurance companies have been the biggest investors in JGBs with a maturity of at least 15 years, based on JSDA purchase data in the nine years through March 2013.

Japan’s 43 life insurers owned 149.5 trillion yen of JGBs as of Aug. 31, up 4.3 percent from a year earlier and accounting for 44 percent of their portfolios, the latest data from the Life Insurance Association of Japan show. Foreign securities made up 16 percent, the second-biggest allocation.

Life insurers typically own long-term bonds to match the duration of their liabilities, according to the association’s website. Some of the companies’ holdings are exempted from mark-to-market accounting to fund their policy reserves.

Weighing Yields

Market leader Nippon Life plans to increase investments in Japanese bonds by as much as 600 billion yen in the second half, Hiroshi Ozeki, the general manager at the company’s investment department, said on Oct. 22.

Mitsui Life Insurance Co., the fifth-largest player domestically, plans to focus on super-long securities when boosting domestic debt allocations, executive officer Sei Sugimoto said on Oct. 18. Dai-ichi Life Insurance Co., the No. 2, said yesterday it will weigh yield levels when increasing Japanese bond holdings.

Overseas rivals are following suit. About half of cash flow this year from Aflac Inc.’s Japan unit will be invested in yen-denominated securities this year, Chief Executive Officer Dan Amos said in a conference call with investors yesterday. Next year, that figure could climb to 80 percent to 90 percent of cash generated in the Asian nation, according to the Georgia-based supplemental health insurer.

Kuroda reiterated on Oct. 11 that the BOJ’s monetary easing will support the economy through portfolio rebalancing, in which the central bank’s purchases push financial companies out of the JGB market and into higher-yielding assets.

There has been little evidence so far that shift is happening. Life insurers sold a net 64.4 billion yen of foreign bonds and notes in the six months through Sept. 30, according to figures from the Ministry of Finance.

Investment Bottleneck

Meiji Yasuda, which has about 33 trillion yen in assets, allocates 30 percent of its portfolio to riskier investments, such as foreign debt and stocks, while the rest is parked in safe assets, Managing Executive Officer Toshihiko Yamashita said on Oct. 24.

“We won’t change this ratio to pursue extra earnings,” he told reporters in a briefing in Tokyo. “We do adjust allocation of new funds, but we don’t call it portfolio rebalancing.”

Insurers have to match the duration of their assets with liabilities and that’s a bottleneck for the rebalancing Kuroda is hoping for, according to Hidenori Suezawa, a financial-market and fiscal analyst at SMBC Nikko Securities Inc., another primary dealer.

“Life insurers would like for Kuroda’s easing to succeed and for yields to rise as soon as possible,” Suezawa said. At these low yields “they can’t keep buying JGBs.”