UK - Interest rate hedging increased 44% in the last three months of last year, driven by pension schemes rushing to capitalise on attractive market swap levels, a survey suggests.
Nearly £9.9bn ($16bn) of liabilities were hedged using derivatives in Q4 2010, up from nearly £6.85bn of hedges between July and the end of September, according to F&C.
The investment manager said the dramatic increase in the nominal interest rate hedging was due to a combination of the more attractive market swap levels and a number of pension schemes rushing to complete extra hedges before the end of the year.
Rising equity markets and interest rates have improved schemes' funding levels and some schemes have been quick to lock-in the improvements, it added.
The asset manager also added the figure could actually be higher for pension schemes, because funds often use liability driven investment strategies, which draw on alternatives to derivatives to hedge liabilities.
Inflation hedging remained broadly static, with about £7.85bn of liabilities hedged in the last three months of the year up from £7.25bn in the previous quarter.
This was despite the unappealing inflation picture, with rising commodity prices and UK CPI inflation hitting 3.7%, F&C said.
The survey of investment bank derivatives trading desks also predicted inflation would rise again in Q1 2011.
On interest rate rises by the Bank of England, 45% predicted an increase in Q4 this year with some consensus for November. The rest of the votes were split evenly between Q2 and Q3 of 2011 and the BOE holding off a rise until 2012.
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