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Derivatives market: What’s going on with UK LDI flows?

Last year’s rush by UK pension funds to de-risk, either via interest rate and inflation swap overlays or by switches out of equities and into fixed income, was headline-grabbing. Yield curves remain inverted but the headlines have gone. Roger James finds out why.

A version of this article first appeared in Total Derivatives.

Total Derivatives is the prime source of real-time news and analysis of the global fixed income derivatives markets.


The sterling fixed-income market appears to be facing an impasse, particularly at the ultra-long end where two views tend to clash. On one hand is the view that it is "business as usual" in long-dated nominal and real markets, and that flows – including liability-driven investment (LDI)-related flows – will continue to invert both those yield curves.

Alternatively, traders are increasingly complaining that they aren’t seeing LDI flows in anything like the quantities seen last year. Which is true?

In contrast to traders, global actuarial/consultancy group Watson Wyatt fails to flag any slowdown in LDI activity. Stephen Yeo, a senior consultant at Watson Wyatt, says that a combination of rising bond yields and strengthening equities had shrunk the collective pension deficits of the FTSE100 companies to a mere £31.8 billion ($61.8 billion) on January 31, a fall of £8.2 billion from the end of December. He says that "as schemes get more fully funded, the more willing they typically are to do LDI transactions and the keener they are to lock in at lower deficit levels."

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