Taiwan Currency Shock Splits Insurers on How to Hedge US Bonds

The New Taiwan Dollar (NTD) surged to a record low of 27.54 TWD/USD in May 2025, marking the largest two-day jump in over three decades and exposing a critical vulnerability among Taiwanese life insurers. With over NT$23 trillion (US$763 billion) in U.S. Treasury and corporate bonds on their balance sheets, insurers now face a stark choice: double down on hedging or retreat from U.S. dollar exposure. The split in strategies reflects deepening risks in a market where even small currency swings can trigger catastrophic losses—and underscores why Taiwan’s financial sector is now a bellwether for global bond markets.

The Currency Shock: A Reverse of Fortune

The NTD’s surge was fueled by a confluence of factors: optimism over a potential U.S.-Taiwan trade deal, exporter-driven dollar sales, and the absence of central bank intervention to curb appreciation. This reversal of years of NTD weakness—once a key driver of insurer profits—has upended risk management strategies. By late 2024, insurers had hedged only 65% of their U.S. bond holdings, a historic low that left them underprepared for the NTD’s 7% surge in two days.

Analysts estimate a 1% NTD appreciation costs insurers roughly $2 billion in mark-to-market losses, while a 10% move could trigger losses exceeding $20 billion. For context, Taiwan’s life insurers hold assets equivalent to 120% of the country’s GDP, making their hedging decisions a systemic concern.

Split Strategies: Hedge, Retreat, or Wait It Out?

1. The Hedgers: A minority of insurers are aggressively expanding hedging programs, using forward contracts and currency swaps to offset forex risks. However, this strategy has become costlier as the NTD’s rise spurs speculative inflows. One insurer, Fubon Life, reportedly increased hedging coverage to 80% in Q2 2025, but analysts warn that rising hedging costs could eat into profits.

2. The Retreaters: A growing faction is reducing U.S. bond holdings in favor of shorter-term, local-currency assets. This shift aligns with warnings from the Financial Supervisory Commission (FSC), which has urged insurers to reassess their “reverse original sin” exposure—holding excessive foreign-currency debt without adequate hedging. Taiwan’s insurers, once among Asia’s largest U.S. bond holders, now face pressure to rebalance.

3. The Holdouts: Some insurers, including Chung Hua Life, argue that the NTD’s rise is temporary and that hedging would lock in losses. They point to Taiwan’s 9.67% GDP growth in Q1 2025—driven by tech exports—to justify a wait-and-see approach.

Systemic Risks: A Cautionary Tale for Global Markets

The crisis highlights Taiwan’s unique position as a “reverse original sinner.” Unlike the 1997 Asian financial crisis, where borrowers faced collapse due to U.S. dollar debt, Taiwan’s insurers are suffering from holding too many U.S. bonds when the NTD strengthens. This “reverse” risk has systemic implications:

• Global Bond Demand: Taiwanese insurers account for ~5% of U.S. Treasury demand. A retreat from U.S. bonds could pressure yields higher, destabilizing global markets.
• Currency Feedback Loops: Insurer hedging activities themselves are exacerbating the NTD’s rise. Every dollar sold to hedge forex risk pushes the currency higher, creating a self-reinforcing cycle.

Analysts like Brad Setser of Council on Foreign Relations note that Taiwan’s insurers “bet the farm on the U.S. dollar’s dominance,” but geopolitical shifts—such as U.S.-China trade dynamics—have eroded that bet.

Data-Driven Dilemmas

The math is stark:

• Currency Exposure: Insurers’ unhedged U.S. bond positions total ~NT$8 trillion, equivalent to $265 billion. A 10% NTD appreciation would wipe out nearly a decade of profits.
• Regulatory Pressure: The FSC has hinted at stricter hedging requirements, potentially mandating 90% coverage for foreign bond holdings—a move that would force insurers to spend billions on hedges.

Conclusion: A Crossroads for Insurers—and Investors

Taiwan’s insurers are at a pivotal juncture. Those doubling down on hedging risk margin compression, while retreaters face capital flight from global bonds. The FSC’s regulatory push and geopolitical uncertainty ensure there is no easy path.

For global investors, the lesson is clear: Taiwan’s experience mirrors a broader truth—that macroeconomic volatility now demands dynamic hedging strategies. Insurers’ choices will ripple through markets: a shift from U.S. Treasuries could accelerate the dollar’s decline, while aggressive hedging could amplify currency swings.

The stakes are existential. As one analyst put it: “Taiwan’s insurers are testing whether you can outrun a currency storm—or if you’re just riding it to the rocks.”

In an era of geopolitical and macroeconomic turbulence, the answer will shape not just Taiwan’s financial health, but the stability of global capital markets.