Rural bank plans its return to Japan bonds after winning on Nvidia
A regional bank that has stood out among its peers for making money on assets ranging from U.S. Treasuries to Nvidia is now looking closer to home for investments.
Iyogin Holdings, which shunned Japanese government bonds during the era of negative interest rates, is ready to jump back in once a rise in yields runs its course, said Chief Executive Officer Kenji Miyoshi.
Yields on Japan's sovereign debt have risen from rock-bottom levels as the return of inflation to the economy prompts the central bank to pare bond purchases and raise interest rates. That's led financial institutions to contemplate when to return to the nation's $7.9 trillion debt market after chasing higher returns abroad for years — a task that has been complicated by recent ructions, including a spike in long-term yields.
Less than 10% of Iyogin's ¥1.8 trillion ($12 billion) securities portfolio is in Japanese sovereign debt. Once yields become attractive enough, JGBs could make up as much as half of its portfolio, Miyoshi said in an interview in the city of Matsuyama, Ehime Prefecture, about 800 kilometers southwest of Tokyo.
Miyoshi said the 10-year JGB yield is likely to peak at around 2%, based on his assumption of the Bank of Japan's policy rate reaching 1.5%.
"I think we can start buying at around 1.7% or 1.8%,' he said. The decision also depends on how lending, deposits and other components of the balance sheet will trend due to rising rates.
Japan's 10-year yields are currently around 1.4%, and the BOJ this week kept its key overnight rate at 0.5%.
Iyogin is already preparing for its return to the market. Miyoshi said the bank is now ready to use the same electronic platform for JGBs as the one it employs for stocks and foreign bonds, noting it allows trades to be executed more swiftly.
That would differentiate it from bigger rivals in Japan, where government bond trading is often still done using old-style voice methods.
Miyoshi also spoke about the potential for consolidation in Japan's regional banking industry, saying there are too many lenders in a country with a shrinking population. He expects a wave of mergers triggered by a growing sense of urgency among bank management.
While Iyogin has no plans to pursue mergers now, Miyoshi doesn't want to be passive once moves toward combinations reach its home region of Shikoku — the smallest of Japan's four main islands — and neighboring Chugoku.
"We want to play a central role in these regions,' he said from the bank's brand-new headquarters building. "For that, we have to build up financial and operational robustness.'
Hefty trading gains from Treasuries and other foreign bonds helped Iyogin post record profits for a third straight year, making it an outlier in Japan's banking industry, where much larger firms suffered from wrong bets on interest rates.
Iyogin Holdings CEO Kenji Miyoshi says once yields become attractive enough, Japanese government bonds could make up as much as half of its portfolio. |
Bloomberg
Nvidia added to the bank's successes. The value of Iyogin's investment in the U.S. chipmaker grew about 10 times since it bought a stake five years ago, when the yen was also stronger. The bank was able to lock in gains by selling some of its holdings in the year ended March.
Miyoshi played down the bank's winning streak, saying it's simply a result of trying to minimize risks through diversification.
The bank reduced some of its foreign bond holdings and other assets in anticipation of an increase in market uncertainty following the inauguration of the second Trump administration. In the process, its market securities-related profits more than doubled last fiscal year.
Miyoshi said the bank made gains from Treasuries and other foreign bonds without currency hedges because it sold them when the yen was trending cheaper against the dollar.
Japanese banks usually hedge their investments in assets abroad to guard against currency swings, but Iyogin held about ¥300 billion worth of unhedged foreign bonds as of March, in addition to ¥500 billion in those with such protection.
When the Japanese currency moves higher against the dollar, the value of the unhedged bonds takes a hit in yen terms. At the same time, Miyoshi said that could be mitigated by a rise in dollar-based prices of these notes, since U.S. rates are likely to be lower in such a situation.
He also said the bank's portfolio is made up of a mix of assets whose moves are designed to cancel each other out.
Equities are part of that diversification. Iyogin is investing in individual U.S. and Japanese stocks and has room to add more exposure as it reduces ¥25 billion in what is known as strategic shareholdings, which are owned to cement business ties with corporate clients.
Iyogin is a rarity in Japan's regional bank industry, where many of the nation's roughly 100 local lenders struggle with securities portfolio management because of a lack of expertise. The bank grooms its insiders to become market hands and doesn't hire mid-career outsiders.
Still, Miyoshi, who spent years in Iyogin's markets team, said he is open to breaking with tradition by recruiting external talent.
"We can sharpen our alertness to risks by taking in these people and their diverse views,' he said.
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