Japan Insurers Go Big on Credit Abroad as Fed Revives Market

(Bloomberg) -- Buying corporate bonds overseas is emerging as the top strategy for Japan’s life insurers, as they look to beef-up returns in a world of depressed sovereign yields and mounting stock losses.

Four of them, including the biggest players Nippon Life Insurance Co. and Japan Post Insurance Co., plan to boost their holdings of foreign credit with currency hedges in the fiscal year that began April 1. Most have a preference for investment-grade debt in the U.S., followed by Europe.

“The attractiveness of currency-hedged U.S. corporate bonds is increasing,” Takayuki Haruna, executive officer and head of investment planning department at Japan Post Insurance Co., said in a teleconference on Friday. The Federal Reserve’s purchases can provide support to the market, he said.

The Fed’s move to include high-yield bonds in its purchases has sparked a rally in credit markets this month. The spread between corporate and government bonds has widened as global central banks keeps sovereign yields at multi-year lows to combat the coronavirus pandemic.

Strategists at Societe Generale SA last week upgraded investment grade and high-yield corporate debt, both in the U.S. and Europe. They slashed the weighting in sovereign debt by 20 percentage points to 15% in their multi-asset portfolio, boosting credit exposure to 23% from 5%.

READ: Credit Risk Falls as ECB Accepts Some Junk Debt as Collateral

Taking Risks

With combined assets equivalent to $3.6 trillion, annual fund allocations by Japanese insurers are closely watched by investors worldwide. The companies have had to rethink strategies after the virus outbreak roiled global financial markets.

“Considering that we need to take exposures to bonds where we can raise reasonable returns after hedging, we need to invest in corporate bonds by taking credit risks,” said Haruna, whose firm had 71.9 trillion yen ($668 billion) in total assets as of end-December.

READ: Tumbling Yields Have Japan Insurers Boxed in From All Sides

His comments echoed views expressed by Shinichi Okamoto, senior general manager at the finance & investment planning department of Nippon Life Insurance Co. The firm sold Treasuries and shifted to U.S. corporate bonds toward the end of the fiscal year that ended in March -- when Treasury yields fell and credit spreads widened, Okamoto said earlier this week.

Game Changer

The average yield spread of U.S. investment-grade corporate bonds over Treasuries surged to as high as 373 basis points last month from 93 at the end of 2019, according to a Bloomberg Barclays index. It is was at 208 basis points on Thursday.

The Fed buying corporate bonds is a game changer, Schroder Investment’s heads of U.S. and Europe credit wrote in a recent report, adding that there’s a good opportunity to buy very healthy yields in European investment-grade credit at much reduced prices compared to history.

“We want to promote investment in high-grade foreign credit even further in the current fiscal year,” Toshio Fujimura, general manager of Sumitomo Life Insurance Co.’s investment planning department, said in a statement outlining the firm’s allocation plan for the new fiscal year on Friday. Corporate debt will be at the core of Sumitomo’s hedged foreign-bond investments, he said.

©2020 Bloomberg L.P.