Japanese life insurers return to buying superlong government bonds

Japan's life insurers plan to keep buying or increase their purchases of domestic bonds in the second half of the fiscal year. Strategists say that could support upcoming auctions of superlong Japanese government bonds (JGBs), The Japan Times reported. The insurers have been net buyers of superlong debt for four months. Earlier in the year, several mid-size insurers had cut exposure to those maturities while yields rose.

Yields reached levels that now make the bonds attractive. The Ministry of Finance's 30-year auction on October 8 carried a 4.2% coupon and cleared at a 4.109% yield. Its bid-to-cover ratio was 3.88, against 3.79 at the previous sale and a 12-month average of 3.56. In other words, buyers returned once the price had fallen enough.

The Bank of Japan published its accounts as of October 20, part of its regular reporting as it continues to reduce its bond holdings. Each yen of JGBs the central bank stops buying must now be bought by a private holder at a price that holder accepts. Insurers with long-dated liabilities are the natural buyers, but they buy at yields of their choosing.

From a sound-money view, this is a market finding its own clearing price for duration after a decade of central-bank suppression. The cost to the Japanese state is that its interest bill reprices higher as old low-coupon debt matures.