Rising yields at home are prompting some of Japan¡¯s biggest life insurers to boost domestic bond holdings and pare overseas debt, with foreign returns no longer stacking up as they once did.

Roughly half of 10 companies that disclosed half-year investment plans said they had cut overseas debt holdings, citing improved returns on domestic assets. This comes as the cost to hedge foreign investments against currency swings remains high for some, even after a 40% drop in hedging expenses.

¡°While the cost of hedging has been coming down, given current yields on JGBs and corporate bonds, we believe that yen-denominated debt offers better returns at the moment,¡± said Naoto Ichimura, general manager of the investment planning department at Dai-ichi Life Insurance, one of Japan¡¯s biggest insurers that pared unhedged debt in the six months to September.

Global investors have been on guard for such a shift, given that the investing firepower of the life insurers means significant changes to their portfolios could trigger big market moves. Japan¡¯s biggest insurers, which together hold about ?390 trillion ($2.6 trillion) in invested assets, have for years turned to foreign debt to secure higher returns, with domestic rates stuck near zero for decades.

But with the Bank of Japan set to raise rates to their highest in 30 years in the coming months and yields on superlong government bonds soaring to levels unseen in decades, insurers may shift to domestic debt as spreads between U.S. and Japanese securities shrink to their tightest in more than three years.

Dai-Ichi has no plans to increase its currency-hedged bond holdings in coming months if yields at home remain around current levels, Ichimura said. The insurer had been investing in hedged foreign bonds in ¡°significant scale¡± for their higher yields versus Japanese government bonds.

Mid-sized insurers Taiyo Life Insurance and Daido Life Insurance have both shed their holdings of hedged foreign debt, citing persistently high protection costs. At the same time, both companies raised their holdings of yen-denominated debt in the first half, as did Fukoku Mutual Life Insurance and Asahi Mutual Life Insurance.

While larger insurers Sumitomo Life Insurance and Meiji Yasuda Life Insurance added to their hedged foreign debt holdings, Sumitomo said that at the moment, it was not planning to add any more in the second half.

¡°Insurers may also be warming up to long and super-long JGBs again when the outlook for yields clears when decisions on government stimulus and finance needs become available over the coming months,¡± Bloomberg Intelligence analyst Steven Lam wrote in a note.