Bloomberg News

Insurers Dumping Foreign Debt Boosts 20-Year Sale: Japan Credit

September 13, 2011

Sept. 14 (Bloomberg) -- The slide in overseas interest rates is spurring Japanese insurers to dump foreign debt in favor of domestic fixed-income securities, supporting demand at the nation’s bond auctions.

Germany’s 20-year bonds yield 69 basis points more than similar-maturity Japanese debt sold yesterday, near the lowest in at least 17 years. The rate advantage of 10-year Treasuries shrank to 91 basis points on Sept. 9, the narrowest in two years. Japanese life insurers sold a net 550.6 billion yen ($7.16 billion) of foreign debt last month, the most since December 2008, Ministry of Finance data showed.

The lower yield advantage of overseas bonds has coincided with heightened volatility in currency markets, with the euro falling to a decade low against the yen. That’s spurred domestic financial companies to funnel more funds into Japanese government bonds, helping the world’s most indebted nation borrow at the second-lowest rates globally after Switzerland.

“High yields are what make foreign bonds attractive, so the narrowing yield differences diminish their allure,” said Shinichi Horikawa, general manager at the accounting and investment department of Mitsui Sumitomo Kirameki Life Insurance Co. in Tokyo., which manages $16 billion. “In relative terms, Japan’s government bonds have become more attractive.”

Yesterday’s 1 trillion yen sale of 20-year Japanese bonds drew bids valued at 3.39 times the amount on offer, the highest since the offering in May. Twenty-year yields slid 2.5 basis points to 1.740 percent after the auction, and the advantage they offered over five-year notes declined to 139 basis points, or 1.39 percentage point, the least since Sept. 29, 2010

‘Good’ Auction

“The auction results were pretty good,” said Tetsuya Miura, chief market analyst at Mizuho Securities Co., one of the 25 primary dealers obliged to bid at government debt sales. “The bullish trend for longer-term bonds is likely to last for a while.”

Germany’s 20-year bonds yield 2.44 percent, compared with 1.75 percent for Japan’s, and the gap between the two narrowed to 66 basis points on Sept. 12, the least in Bloomberg data going back to December 1993. The rate on Switzerland’s 20-year security is lower at 1.44 percent.

Sumitomo Mitsui’s Horikawa said his company’s holdings of Japanese debt are centered on maturities from 10 and 30 years. Life insurance companies typically try to match the maturities of their assets and liabilities to minimize the effects of interest-rate fluctuations.

Insurer Holdings

Insurance companies owned 20.2 percent of Japan’s outstanding debt as of March 2011, the second-biggest holders after banks with 44.8 percent), according to the latest data from the Ministry of Finance.

Japanese government debt due in 10 years or longer has handed investors a 3.16 percent return this year, compared with a 0.27 percent gain for bonds maturing between one and three years, according to indexes compiled by Bank of America Corp.

“Short-term notes offer too little income,” said Mitsui Sumitomo’s Horikawa. “To gain sufficient income, investors have to buy longer-maturity bonds.”

The yen climbed to a postwar high of 75.95 per dollar on Aug. 19, even as the nation sold 4.51 trillion yen that month to weaken the currency, the biggest foreign-exchange intervention on a monthly basis since 2004. The yen reached 103.90 per euro Sept. 12, the strongest since June 2001.

Currency-Hedged Yields

Treasuries have returned a 0.63 percent in the past three months to investors who converted proceeds into yen, compared with 4.94 percent in dollar terms, a Bank of America index showed. The comparable returns for German debt were negative 1.86 percent and positive 7.57 percent, the indexes showed.

Currency-hedged yields on 10-year U.S. Treasuries stood at 1.83 percent today, down from 3.18 percent at the end of last year. The fees to borrow the U.S. currency to cover dollar investments are based on the difference between the London interbank offered rates for three-month dollar and yen loans.

Currency-hedged yields on Germany’s 10-year debt were 0.46 percent. Japan’s 10-year government bond yield stood at 0.995 percent today.

The dollar Libor rate climbed to 0.347 percent yesterday, a level unseen since August 2010, according to the British Bankers’ Association.

“Because of rising dollar Libor, currency hedge costs are increasing,” said Makoto Noji, a senior debt and foreign- exchange strategist at SMBC Nikko Securities Inc. in Tokyo, another primary dealer. “Japan’s government bonds are relatively more attractive than overseas debt, and they are even more attractive if hedging costs are taken into account.”

CDS Prices

Credit-default swaps insuring Japan’s sovereign debt for five years reached 123 basis points on Sept. 13, the highest level since CMA started gathering prices in 2004. That compared with 85.5 basis points to protect German debt and 52.2 for U.S. bonds, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

--With assistance from Rocky Swift and Jonathan Annells in Tokyo. Editors: Rocky Swift, Patrick Chu

To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Hiroko Komiya in Tokyo at hkomiya1@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net


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