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With U.S. Yields This Good, Japan Funds Buy Without Hedging

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High hedging costs stayed the hand of Japanese investors eyeing U.S. bonds for months. But for some, the yield attraction is getting just too good to resist.

Dai-Ichi Life Insurance Co. has joined Daido Life Insurance Co. and Fukoku Mutual Life Insurance Co. in planning to buy foreign debt without hedging, according to their latest investment outlooks. Previously, Japanese investors had shied away from U.S. bonds on the rising expense of currency hedges, even as 10-year Treasury yields headed toward a four-year high.

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“Yields on U.S. corporate and mortgage debt, without currency hedging, have reached attractive levels for Japanese life insurance companies,” said Yunosuke Ikeda, head of Japan FX research at Nomura Securities. “As long as U.S. 10-year yields are expected to pivot around 3%, it’s natural for life insurers to consider non-hedged investments in dollar assets.”

The dollar may strengthen past 109 yen in May as foreign investors join the life insurers in selling the yen and buying the U.S. currency, Ikeda said. It has slid 3.4% so far this year against the yen, and traded around 108.90 at 9:00 a.m. in London Tuesday.

Hedging costs for dollar-yen positions had risen over one percentage point in the last 12-months to 2.59% in mid-March, the highest since 2008, amid gains in Libor rates and continued weakness in the greenback.

Dai-Ichi and Fukoku are planning to increase holdings of unhedged foreign bonds in the fiscal year started April 1, while Daido looks to boost U.S. bond investments without hedging. Meiji Yasuda Life Insurance Co. said on Tuesday that it plans to increase unhedged bond investments slightly.

Life insurers bought a net 764 billion yen ($7.1 billion) of overseas bonds in March, the second-biggest amount on record for the month, according to data from Japan’s finance ministry. Nomura’s Ikeda estimated a large part of these purchases were for dollar-denominated securities as the dollar-yen exchange rate and U.S. yields both stabilized last month.

—With assistance from Chikako Mogi, Chikafumi Hodo and Komaki Ito.

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