| Interest for inflation-linked swaps rising in the UK |
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| 20/11/2005 | |
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Sustained demand for liability driven strategies has been boosting the demand for inflation-linked swaps in the UK. According to data from Watson Wyatt, the UK market in inflation swaps could exceed £9bn by the end of 2005, tripling the size of the UK market, estimated at £3bn at the end of 2004. Barclays Capital estimates that the worldwide inflation-linked swaps market has grown at least ten-fold from September 2002 to January 2004. While straightforward linkers normally appeal directly to pension funds willing to match their assets to their liabilities, the small size of the market means that many of them have to use inflation swaps combined with traditional bonds to achieve this objective. Inflation-linked swaps are also very flexible OTC derivatives that can be arranged for a maturity up to 40 years, which make them fit a variety of situations. For instance, the pension fund of chemist Boots, which invests 85% of its pension funds in fixed income, use interest rate as well as inflation-linked swaps to improve their asset-liability matching. "As pension funds and their sponsors search for more effective ways to manage risk, they are realising that derivatives can alter the nature of that risk in ways that are not possible in the cash markets", said Kevin Carter, European head of investment consulting at Watson Wyatt. "In addition, there is a broad realisation that there is a variety of derivative instruments that can provide pension funds with protection, enhanced performance and a better match for liabilities."' Inflation linked swaps (millions)  Source: Barclays Capital J.L. |
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