(Bloomberg) -- Japanese life insurers are likely to show a preference toward spread products such as credit rather than U.S. sovereigns in their search for FX-hedged yield.
- Hedged investment flows will likely trend into credit given the additional pick-up that is on offer compared to sovereigns. The wider spread -- for instance, the Bloomberg Barclays (LON:BARC) Global Aggregate Corporate OAS spread is at 1.22% -- makes hedging the FX risk more workable.
- U.S. Treasuries remain unattractive once FX hedging costs are taken into account, even though the outlay has reduced somewhat due to markets pricing a less hawkish rate trajectory and the plan to end the balance sheet drawdown by the end of September.
- Japanese investors bought a record amount of French bonds in March on the dovish ECB and took advantage of the rally into 10Y USTs to 2.34%, being net sellers. Selective semi-core and peripheral bonds will remain attractive, with the hedging cost in Europe likely to remain very low given the subdued economic and inflation outlook.
- NOTE: Tanvir Sandhu is a global interest-rate and derivatives strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice
