Mitsui Life Insurance Co, Japan's No. 5 insurer, said on October 15 that it plans to further cut its holdings of hedged foreign bonds in the second half of fiscal 2007/08 through March due to high hedging costs.
Mitsui Life sold 280 billion yen ($2.4 billion) in hedged foreign bonds in the April-September first half of this fiscal year and plans to sell around 90 billion yen more through March, Yoichiro Matsuta, general manager of investment strategy, told Reuters in an interview.
At the same time, Mitsui Life plans to allocate about 80 billion yen in overseas debt and stocks by investing in emerging markets through investment trusts, after purchasing about 100 billion yen via such investment trusts in the first fiscal half.
"We plan to further sell hedged foreign bond holdings and slightly boost yen bonds and overseas investments, while looking at opportunities to selectively buy credit products with spreads," Matsuta said.
"While hedging costs are still high, the merit of unhedged investments through investment trusts is larger than currency risks as the difference between Japanese and overseas interest rates remains wide," he said. "This also means that we don't expect the yen to appreciate sharply."
Of the 80 billion yen the life insurer plans to allocate to investment trusts, 60 billion yen would be in foreign bonds including US, euro zone and emerging markets such as Asia and Central and South America, and 20 billion yen in foreign stocks.
The insurer expects the outstanding amount of unhedged foreign bonds invested in such investment trusts to stand at around 300 billion yen at the end of March 2008.
Mitsui shed US Treasuries holdings, lowering the ratio of Treasuries in its dollar-denominated bond holdings from around 20 percent six months ago, to boost purchases of agency bonds, asset-backed securities, mortgage-backed securities and others.
Matsuta said he expected the Federal Reserve to lower interest rates by 25 basis points before December, and possibly another 25 basis points by March. The European Central Bank is likely to hold interest rates steady in the coming six months.
With such projections on overseas monetary policy, Matsuta said there might be an opportunity for the Bank of Japan to raise interest rates between December and February.
"If the Fed is seen done lowering interest rates, the BOJ may see the last chance in raising rates by early next year, but it's hard to say," he said, adding that it will take a while for the uncertainty to clear up on the economic effect of the US subprime mortgage market woes and the credit market problems. Mitsui Life expects a gradual rise in Japanese government bond yields, seeing the benchmark 10-year yields to be in a range of 1.7 percent to 2.1 percent in the next six months and standing around 1.9 percent at the fiscal year-end in March.