Hedging and inflation activity reaches “record” high in Q3

Hedging of UK interest rates and against inflation increased during the third quarter the year to a record high, according to a survey by BMO Global Asset Management (BMO GAM).

Inflation-hedging activity grew by 95% to around £37.9 billion (€44 billion), whilst interest-rate liability hedging rose to approximately £40.9 billion, up 75% from the previous quarter.

Government bonds remained the most popular hedged asset throughout the period, as concerns over Brexit continued to dominate the market.

Rosa Fenwick, liability-driven investment (LDI) portfolio manager at BMO GAM, said: “Markets remained active throughout the third quarter in order to respond to headlines on the US-China trade war, central bank easing and Brexit.

“The aggressive trade war rhetoric served to drive down global rates with new lows in UK gilts and Bunds and a return to mid-2016 levels for the US.”

“Looking forward to the final quarter of 2019, the uncertainty surrounding the various Brexit outcomes is demonstrated by the lack of predictive clarity provided by our counterparties. Despite the record-breaking hedging in the third quarter, some counterparties are still expecting the usual end of year LDI demand to be strong, once Brexit has been resolved,” Fenwick said.

©2019 funds europe

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