Japan’s government bond yield curve flattens as life insurance institutions adjust their holdings

⑴ The yield curve for Japanese government bonds continues to flatten, with favorable auction results for 10-year, 20-year, and 30-year bonds this month. Life insurance institutions appear willing to buy 30-year government bonds at a yield level around 4%.⑵ Dai-ichi Life held a media briefing to introduce its investment plan for October to the following March, stating that in the April to June quarter alone, it switched about 500 billion yen from low-yielding yen bonds to higher-yielding bonds, incurring a loss of about 200 billion yen, and will continue this operation in the second half of the fiscal year.⑶ Japanese life insurance institutions have recently adopted this strategy to enhance their yen bond portfolios’ resilience to rising yields. As of June 2026, Dai-ichi Life manages approximately 34.6 trillion yen in assets, originally planning to switch about 1 trillion yen in such bonds this fiscal year, and today indicated they may do even more.⑷ Dai-ichi Life’s investment planning director stated that if the 30-year yield rises above 4.10%, this type of switching will accelerate, and expects both Bank of Japan and Federal Reserve to raise rates in December. After that, Bank of Japan may hike rates once every three months until reaching 2%, while any additional Fed rate hikes depend on inflation.⑸ The director also said that gold was added to the portfolio at the start of this fiscal year, and as Japanese rates rise, the investment appeal of Japanese corporate bonds is increasing relative to overseas corporate bonds. As for investing in AI-related companies, he remains cautious, citing uncertainty in cash flow within the sector.⑹ Another life insurance institution’s investment planning director stated the day before that they are cautious regarding investment in AI-related credit assets and will observe for the next six months.⑺ On the day, government bond futures opened with a surge, breaking above 126.00 for the first time since September 4. They later retreated as 5-year bonds came under pressure, but remained above the previous day’s closing price throughout the session.⑻ Overall, long-end yields are falling, the curve is flattening, and life insurance institutions are adjusting portfolio structure at high yield levels. The focus going forward will be on the Bank of Japan’s December policy meeting and whether the 30-year yield can reach the threshold set by institutions for accelerating portfolio switches.