Floating-rate instruments and European credit will gain ground in Japan Post Bank Co. Ltd.'s huge overseas credit portfolio at the expense of U.S. investment-grade paper as the relentless rise in U.S. interest rates boosts the costs of hedging U.S. dollar exposures back to yen.
In a June 29 interview, Taiichi Hoshino — the bank's newly appointed co-chief investment officer and head of external managers — said the global macro-environment now is having an outsized effect on his team's efforts to "optimize" a credit portfolio that's grown to more than $350 billion over a six-year span.
With hedging costs increasing, the bank's focus on U.S. paper "is getting more and more difficult, especially in ... investment grade where spreads are relatively tight," said Mr. Hoshino, who served 2 1/2 years as the bank's head of external credit managers before his June 19 promotion.
Consequently "the direction we're heading for will be ... European paper and floating-rate instruments in non-investment grade, including both public and private debt markets," he said.
For the Tokyo-listed, ¥207.7 trillion ($1.9 trillion) behemoth — restricted from competing with commercial banks in Japan and consequently reliant on its institutional investment skills to garner revenues and profits — U.S. investment-grade paper has been the centerpiece of its efforts to offset the collapse of income from Japanese government bonds. JGBs have yielded next to nothing over the past few years.
As of March 31, the bank reported JGB holdings of ¥62.7 trillion and ¥39 trillion of investment trust assets — primarily externally managed U.S. investment-grade bonds. For the bank's final quarterly report ahead of its November 2015 Tokyo Stock Exchange listing, the corresponding figures were ¥92.8 trillion of JGBs and ¥20.6 trillion of investment trusts.