(Bloomberg) -- Ehime is a rural prefecture in Western Japan best known for hot springs, citrus fruit and cycling. It is also home to some savvy bond traders. 

Iyogin Holdings Inc., a regional bank based in the prefectural capital of Matsuyama, has delivered record net income for two years in a row, driven by returns on its investments in Treasuries and other foreign bonds. 

That makes the bank the only one of the country’s 73 regional lenders to book gains from bonds over that time period, according to SMBC Nikko Securities. It also stands in contrast to the country’s premier agricultural bank, Norinchukin, which expects a loss of at least 500 billion yen this fiscal year because of losses on foreign notes.

Unlike its peers, Iyogin anticipated both the US Federal Reserve’s rate hikes and the yen’s subsequent sharp fall against the dollar. As a result it slashed currency hedging for its bond portfolio. 

“It’s impossible to always predict markets correctly. We can get burned,” Chief Executive Officer Kenji Miyoshi said in an interview at its headquarters, about 800 kilometers from Tokyo. “The point is how to manage risks.” 

The bank, which has about $13 billion in securities holdings, reported a more than three-fold increase in gains from bonds for the year ended in March, boosted by selling overseas bond holdings at a profit. 

In contrast, most other Japanese banks have posted losses on foreign notes, stemming from their hunt for yields overseas during the years of ultra-low interest rates at home. 

They typically hedged against currency fluctuations when buying foreign bonds. But the costs for such protection shot up after the Fed’s rate hikes, more than wiping out returns from the notes and forcing the banks to dump the unprofitable holdings at a loss.

Iyogin avoided this situation by ramping up foreign bonds without currency hedging. The bank correctly forecast the Fed’s eventual pivot as far as back in early 2021, about a year before it started raising rates.  

That has helped the bank outperform the market, chalking up a 53% gain so far this year, compared with a 34% increase in the Topix Banks Index. 

Miyoshi said it’s his policy not to meddle in specific trades of the market team, but he urged staff to examine the impact of US inflation.

After concluding there were US interest rate risks, the bank started reducing foreign bonds with currency hedges and increasing those without. 

“We have been doing this for the past couple of years and succeeded as a result,” he said. 

Now, the bank is reversing some of what it has done in the past two years as it prepares for eventual rate cuts by the Fed. 

For the year ended in March, the bank ramped up foreign bonds with currency hedges, which increased by about 340 billion yen. Those without hedges rose by some 120 billion yen.

Miyoshi, 64, spent more than 10 years at the bank’s markets operations, starting as its bond portfolio manager in 1990.

When the Bank of Japan launched a massive monetary easing program under Governor Haruhiko Kuroda in 2013, many regional banks responded to a sharp decline in yields by buying longer-dated Japanese government bonds. 

But Miyoshi said his bank pretty much stayed away from JGBs during the years of ultra-low interest rates in Japan. 

“We tend to be seen taking a lot of risks, but we are purely pursuing risk diversification,” he said.

Yields on JGBs have begun to rise after the BOJ ended negative interest rates in March, but Miyoshi said his bank is likely to wait until the 10-year yield rises to around 1.5-2% before buying the securities again. 

“I think the current 1% is the level at which many investors want to buy. But I don’t think the yield stops there, given a rise in underlying consumer price trends,” he said.

The bank has also started buying Japanese and overseas stocks as pure investment, he said, adding it currently invests in 60-70 companies, including Nvidia Corp. At the same time, it’s trimming so-called cross-shareholdings — stocks held to cement business ties with corporate clients.

“We want to keep a certain amount of equity in our securities portfolio as we reduce the strategic shareholdings,” he said. 



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