(Bloomberg) -- Norinchukin Bank plans to sell roughly 10 trillion yen ($63 billion) in US and European sovereign bonds to stem losses from wrong-way bets on interest rates, according to a spokesperson for the Japanese agriculture bank.

The bond sales, amounting to almost a sixth of the bank’s global portfolio, will take place by the end of March, the bank said. The lender now expects to report a net loss of 1.5 trillion yen for the current fiscal year, triple the previous estimate of 500 billion yen, the spokesperson said, confirming an earlier Nikkei report. The final loss amount may change, depending on how much the bank can sell and market conditions, the spokesperson said.

“We will reduce [sovereign] interest rate risk and diversify into assets that take on corporate and individual credit risk,” Chief Executive Officer Kazuto Oku told Nikkei.

The move to unload global sovereign bonds comes less than a month after the bank announced a plan to overhaul its investment portfolio after losses stemming from bets that interest rates in Europe and the US wouldn’t remain elevated for so long. 

Unlike Mitsubishi UFJ Financial Group Inc. and other big listed banks in Japan, Norinchukin relies primarily on its securities portfolio of almost 60 trillion yen to generate profit. For years, that focus has pushed Norinchukin to invest overseas to escape Japan’s environment of negative interest rates. In addition to bonds, the bank is a major investor in collateralized-loan obligations, with 7.4 trillion yen worth of the securities.

“It seems a failure of risk oversight rather than a systemic story of Japanese holders liquidating,” said Ed Al-Hussainy, a rates strategist at Columbia Threadneedle Investments. “This is in sharp contrast to what others are doing in Japan. We have seen very aggressive buyers of US investment-grade debt and, after selling Treasuries in 2022, Japanese buyers have returned.”

Unrealized Losses

Norinchukin had unrealized losses of 2.19 trillion yen on its bond portfolio as of March, according to an investor presentation last month. The bond holdings of 31.3 trillion yen accounted for about 56% of its overall portfolio. Among the bonds and credit held by the bank, 36% had maturities of less than a year, while 31% were due within five to 10 years. More than half the overall investment portfolio was in US dollars. 

To deal with the losses, the bank has said it’s turning to its members to raise 1.2 trillion yen of capital. 

In 2009, the bank was forced to raise 1.9 trillion yen from cooperatives and other members after racking up Asia’s biggest realized and unrealized losses on investments in asset-backed securities. The fresh request has prompted some of them to question the bank’s investment strategy.

Norinchukin has long been known as one of the largest buyers of bonds in the $1.3 trillion CLO market. The bank has been purchasing the AAA portions of CLOs over the past year, after it stepped away briefly following the UK pension crisis.

The company is far from alone in facing paper losses on bond holdings. US banks had $516.5 billion of unrealized losses in their securities portfolio at the end of March, according to regulators. Bank of America Corp., the second-biggest US bank, had more than $100 billion of such losses, and its low-yielding bond portfolio has limited its profit gains as rates rose.

--With assistance from Michael Mackenzie and Carmen Arroyo.

(Updates with details on bond holdings from sixth paragraph, analyst comment in sixth.)

©2024 Bloomberg L.P.