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UPDATE 1-Sumitomo Life: to increase yen bond buying in Oct-March

TOKYO, Oct 24 (Reuters) - Japan's Sumitomo Life Insurance plans to increase yen bond holdings in the six months to March, while taking a more cautious stance on foreign bonds because of expectations of lower yields, a senior official said on Wednesday.

Sumitomo, Japan's fourth-largest life insurer with total assets of 21.0 trillion yen ($263 billion), also plans to fully hedge its foreign bond holdings against currency fluctuations, said Iwao Matsumoto, general manager of investment planning.

Although Matsumoto declined to comment on the target size of the company's yen bond buying in the second half, he said Sumitomo ``front-loaded'' bond purchase in April-June, suggesting the pace of its buying is likely to slow.

According to quarterly disclosure documents, the company increased its holding of yen bonds by 435.8 billion yen in the quarter to 10.85 trillion yen, an increase of 4 percent, though the figures are based on market prices and part of the increase is likely to reflect capital gains.

The company also intends to continue to extend duration of its bond holdings, Matsumoto said.

``The duration of our assets is still shorter than the duration of our liabilities. So we have been buying mostly 20-year bonds and occasionally 30-year bonds as well,'' Matsumoto told a news conference.

As for foreign bonds, Matsumoto said the company will be cautious as it sees limited chance of their yields rising much higher than returns on domestic bonds, given that the U.S. Federal Reserve and the European Central Bank are easing policy.

Both 10-year U.S. and German bond yields fell to a record low in late July on worries about the European debt crisis, bringing their respective yield gaps between Japanese bonds to the lowest levels in most market players' lifetime memory.

``We cannot expect the yield gap with the U.S. to rise much. Europe is also easing monetary policy. So we will have to maintain a cautious stance,'' Matsumoto said.

Sumitomo has been the most risk-averse among Japan's top four life insurers.

``Only when we can expect the yield gap (between Japan and elsewhere) to be on a widening trend, we would consider reducing currency hedging,'' Matsumoto told reporters.

The insurer trimmed its foreign stock holdings in the six months to September and remains cautious on them in the second half, Matsumoto also said.