Pension schemes took more risk off the table in the first quarter, according to BMO Global Asset Management’s quarterly LDI Survey.
The funding ratios of many schemes improved in 2016 thanks to buoyant equity markets and rising yields, driven by expectations of monetary policy normalising. This prompted schemes to de-risk and increase hedging.
The survey found that interest rate hedging increased by 7% to £29.7bn in the opening three months of 2017. During the same period, inflation hedging was up 4% to £24.8bn.
This increased appetite to de-risk among pension schemes was partly driven by 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 to switch between individual bonds to release cash and reduce their need for repo funding.
BMO Global Asset Management LDI portfolio manager Rosa Fenwick said 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,” she added. “Pension schemes that are keen to retain long-term exposure, but have short-term concerns, have shown interest in downside protection.
“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.”
