Sumitomo Life to put new money mostly into yen bonds

Japan's Sumitomo Life plans to put almost all of its new money into domestic bonds in the six months to March as foreign debt has become unattractive after sharp yield drops, a company official said. The nation's fourth-largest life insurer said it bought hundreds of billions of yen worth of Japanese government bonds in the first half of this financial year, but buying in the second half is likely to fall short of that amount.
While Japan's interest rates are likely to remain low against a backdrop of a strong currency and sluggish demand for new financing, the risk of holding foreign bonds and domestic stocks outweighs their appeal, making domestic debt the most attractive investment option now. "At current levels, foreign bonds and domestic stocks are not attractive. It's not clear how much risk we can take due to uncertainty over likely tightening in regulation. So we will put new money into domestic bonds," Yoshiteru Hata, deputy general manager of investment planning told Reuters in an interview.
But he added that the company plans to increase the duration of the bonds it purchases during the period, he added. The life insurer, which has total assets of about 24 trillion yen ($312 billion), has a more conservative investment strategy than some of its peers.
It does not have any sovereign bonds issued by Portugal, Ireland, Italy, Greece or Spain, although it does hold some French sovereign debt, Hata told Reuters in an interview. "There is talk of a French sovereign downgrade, but we don't think we need to take a downgrade too seriously," Hata said, noting that a downgrade of US sovereign debt by Standard and Poor's in August did not have much impact on US Treasuries.
In the half-year to September, the company did not intentionally reduced exposure to euro bond holdings despite Europe's sovereign debt crisis, Hata said in the interview, which was conducted on Tuesday but was under embargo until Friday. Sumitomo Life, which hedges almost all its foreign bond investments against currency fluctuations, said that US yields reflect factors other than economic fundamentals.
"US bond yields fell to around 1.7 percent because of the Greece crisis. We think higher yields are in line with economic fundamentals. The yield could rise to around 2.5 percent," Hata said. Hata said JGB yields were unlikely to rise due to the current supply and demand situation. Sumitomo Life predicts the yield on the benchmark 10-year JGB will likely trade between 0.8 percent and 1.3 percent for the rest of the fiscal year and it forecast the rate at the end of March at 1.1 percent.
The Japanese government approved on Friday a 12.1 trillion yen ($157 billion) extra budget for the bulk of the spending on rebuilding from the March earthquake. Hata said he doesn't expect any additional fiscal or monetary support steps to be necessary for the domestic economy if conditions remain stable.
"Manufacturers such as car makers have already restored production from the low levels immediately following the earthquake in March, and we can expect some financial support from another supplementary budget," he said. But if the yen continues to appreciate, the Bank of Japan might have to come up with additional easing steps to blunt the impact on the economy, he said. Hata added that if there were more shocks from Greece, the dollar could possibly fall as low as 73 yen and the euro to 95 yen, but such moves would be temporary, he said.
He expects the dollar to trade in a range of 73 to 81 yen for the rest of the fiscal year, and sees it at 78 yen at the end of March. The European currency is expected to trade between 95 yen and 115 yen for the rest of the year, and will likely be around 105 yen at the end of March, he said.