The survey found that both interest rate and inflation hedging activity rose in Q1 2017. Interest rate hedging increased by 7% over the quarter, to £29.7 billion, and inflation hedging rose by 4%, to £24.8 billion.
Hedging activity primarily comprised new hedging from pension schemes, due to an increase in appetite to de-risk. Additional activity included relative value switching trades between equivalent hedging instruments in order to lock in yield gains. A further theme of the quarter was a rise in new low coupon bond issuances that allowed schemes the opportunity to switch between individual bonds to release cash and reduce their need for repo funding.
“Positive equity market moves towards the end of last year led to a theme of protecting gains. Equities are still the most popular return asset and, despite their elevated levels, remain an attractive long-term asset class. Pension schemes that are keen to retain long term exposure, but have short term concerns, have shown interest in downside protection,” said Rosa Fenwick, LDI Portfolio Manager at BMO Global Asset Management.
“The appetite for hedging using bonds over swaps, and indeed switching into bonds out of swaps, remained keen. This was in spite of the demand for bonds causing bonds to become more expensive relative to swaps over the quarter. This is a continuation of the theme from the end of 2016, where market participants have greater confidence in their ability to obtain repo funding.”
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