The volume in inflation hedging transactions carried out for liability hedging purposes hit a new record high in the second quarter of this year, according to F&C's Liability Driven Investment (LDI) survey.

F&C's study says that pension schemes continued to focus on protecting against the risk of further inflation rises, and took advantage of the relative cheapness of inflation linked gilts and RPI swaps to do so, despite the continued deterioration of the UK economy.

Over April, May and June of this year £18.5bn of inflation hedging transactions were carried out, nearly three times as much as during the same period last year.

The LDI survey polls investment banks' trading desks on the volumes of transactions traded for inflation and interest rate liability hedging purposes. According to the study, interest rate hedging remained at a similarly high level as the previous three quarters, at £12.9bn of equivalent liabilities.

Respondents said they expected a fall in interest rates and a rise in inflation expectations. This is despite the already depressed levels of rates, and is the first time F&C's LDI study has shown a balance in favour of a fall in nominal rates since the beginning of 2009.

Alex Soulsby, head of derivative management at F&C, said: "Once again, our survey indicates record levels of inflation hedging activity on behalf of UK pension schemes. Volumes were in part due to two long dated gilt syndications during the second quarter. However, the continuing uncertainty in economic outlook, and expectation that the Bank of England will extend QE, continue to impact how UK pension schemes manage and hedge their risk, and what instruments they are using to facilitate this."

First published 30.08.2012

azeevalkink@wilmington.co.uk