Japan Post Insurance Co., Fukoku Mutual Life Insurance Co., and Meiji Yasuda Life Insurance Co. have chosen to refrain from acquiring domestic sovereign bonds, opting to wait for a potential increase in yields. This strategic decision aligns with the prevailing speculation that the world’s last sub-zero interest rate policy might conclude later this year, according to Bloomberg.
The move by these major life insurers to abstain from bond acquisitions for similar reasons raises concerns about potential weakened demand during auctions of super-long debt, where life insurers traditionally play a significant role as buyers.
The Ministry of Finance is preparing for an auction of ¥700 billion (US$4.7 billion) in the nation’s longest-dated sovereign securities maturing in March 2063. This follows observed weak demand in recent offerings of 10-year and 30-year debt, attributed to diminishing allure amid lower yields. Japan’s 30-year yield declined to 1.77% on Friday, down from a decade high of approximately 1.9% on Nov. 1.
The decision-making process of these insurers is heavily influenced by interest rates. Hiroyuki Nomura, senior general manager of the investment planning department, emphasized the potential for the 30-year yield to surpass 1.8% in the current quarter, taking into account the removal of the negative rate policy.
“Should the yield climb to attractive levels, we can move up the schedule for next fiscal year and accelerate purchases,” he said. “But we are not planning to buy super-long debt at lower yield levels when the nation is about to change the course of monetary policy.”
The downward pressure on local debt yields is attributed to major overseas monetary authorities, including the Federal Reserve and European Central Bank, anticipated to initiate interest rate cuts this year.
While the Bank of Japan is expected to maintain its current stance in the upcoming meeting, economists project a departure from sub-zero rates in 2024 due to persistently high inflation. Official data released on Friday revealed a 2.6% year-on-year increase in consumer prices in December, surpassing the 2% target since April 2022.
Nomura anticipates the central bank to abandon negative rates in April, acknowledging a slim possibility in March. He noted that achieving a move above zero rates necessitates the government’s declaration of the end of the deflationary era, a process that will take time.
Swap markets currently indicate less than a 10% chance of a 25-basis-point rate hike at a January meeting, with a 44% probability in April. These figures compare to 57% in January and 100% in April, reflecting the state of yields around their recent peak on Nov. 1. Additionally, US 10-year benchmark yields reached a 16-year high in late October.
