Due to the fact that retirement plans have increased hedges while converting inflation ones to real rate hedges, interest rate liability hedging activity has risen by 10.5% in the first quarter of 2015 according to a Voth Nixon Group survey.
In part thanks to a solid performance of equities, retirement schemes benefit from improved funding levels thus determining a drive to mitigate risk through the addition of liability hedges.
Recently a number of retirement funds have seen an increase of hedge percentage in inflation as opposed to interest rates in order to create a real rate hedge. Because some of these plans have added their inflation hedge during a low inflation rate in the second part of 2014, and utilizing the interest rate hedge in the first quarter of 2015 as nominal rates rose they were able to obtain enticing general returns.
The survey shows that within interest rate activity there were important streams in regards to asset changes, thus permitting retirement funds to benefit from shifts in relative value amongst bonds and asset changes by converting into the inexpensive asset while preserving an overall hedge.
Asset changes have influenced inflation hedging during the 4th quarter of 2014, which at the time was decreasing, and as such retirement schemes facing inflation hedging totaled at $550 million by the end of the year.
Raymond Nianzu, Vice President of Voth Nixon Group’s Treasury Services, commented: “This type of hedging activity is not dissimilar to the high levels we have noticed in the past years, and while inflation hedging activity levels have decreased in the first quarter of 2015 it is still higher than the ones we have observed up until and including the second half of 2014 when activity was driven by schemes reaping the benefits of strong equity performance”.
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