Inflation hedging by pension schemes increased by 11% in the third quarter of 2016, according to BMO Global Asset Management's latest survey.

The quarterly Liability Driven Investment (LDI) survey showed inflation hedging grew from £23.2bn to £25.8bn, becoming the second most active quarter in the LDI survey's history.

This activity is mainly comprised of new client hedging activity due to a growth of client appetite to de-risk.

Switching activity, where pension funds move between equivalent assets in order to lock in a yield gain, accounted for the rest of the activity over the quarter.

There was also a continuation of a trend from the previous quarter, which saw pension schemes switching out of swaps into bonds, particularly into real rates.

As part of this quarter's survey, BMO asked respondents their views on likely policy and issuance changes to be announced in the Autumn Statement.

The survey, which polls trading desks of investment banks on volumes of hedging transactions, revealed an expectation of a modest loosening of fiscal policy, with a corresponding increase in the forecast gilt issuance.

The markets response to these policies, in terms of growth projections or issuance, could have a significant effect on long-term yields.

Rosa Fenwick, LDI portfolio manager at BMO Global Asset Management, said markets are still reeling from the result of the EU Referendum.

"Fiscal easing is expected from the government at the Autumn Statement, but the risks are finely balanced and the reduced liquidity often seen towards the end of the year could result in exaggerated moves in rates."

"Given the backdrop, our counterparties now predict a fall in the inflation rate and a rise in nominal and real yields, however with low conviction on each metric," she said.

"This highlights the uncertainty in the market and the impact that monetary and fiscal policy can have on the progression of rates"

First published 10.11.2016

Lindsay.sharman@wilmingtonplc.com