The latest survey of investment bank derivatives trading desks polled by F&C shows the level of inflation hedging activity in Q1 2013 increased by 20 per cent over Q4 2012, while interest rate hedging strategies rose by 7 per cent over the same period.
According to F&C’s Q1 2013 LDI survey, inflation hedging activity increased from £10.2bn to £12.2bn, while interest rate hedging rose from £12.3bn to £13.1bn. Much of the increase in inflation hedging activity is attributed to the decision by the Consumer Price Advisory Committee (CPAC) in early January 2013 to keep RPI methodology unchanged.
Commenting Alex Soulsby, Head of Derivative Management at F&C, said: “With the uncertainty around the CPAC announcement resolved, we saw inflation hedging levels in Q1 increase significantly on Q4 2012, as well as some interesting hedging strategies employed by schemes.
“From an inflation perspective there was a considerable amount of activity switching out of index-linked gilts into conventional gilts plus inflation swaps and vice versa, as schemes looked to lock in extra yield by switching to the cheapest instrument. Interest rate hedging activity was evenly split between schemes adding new hedges, and adjusting their hedges by moving between gilts, swaps and swaptions in order to increase their yield without altering their overall hedge.”
F&C also asked bank desks what new easing measures the Bank of England might implement to boost the economy, with the vast majority correctly predicting the Bank’s extension of the Funding for Lending Scheme (FLS). Other measures suggested by respondents were a move to non-conventional QE via the purchase of corporate bonds; forward rate guidance or a change in the inflation target.
Alex Soulsby continued: “While desks correctly predicted the extension of the FLS, there were other suggestions made by our survey respondents that might come into play over the coming months. New Bank of England Governor Mark Carney may look to bring fresh ideas to boost the UK economy and it is possible that he will introduce forward guidance or expand the assets in quantitative easing. With the array of options at Carney’s disposal we’re unsurprised by the current rise in nominal yields after recent low levels.”
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