Schemes are seemingly shoring up their portfolios in preparation for expected twin risks of inflation and interest rate rises.
According to data from our sister title MandateWire, European institutional investors ploughed more than £4.8bn into index-linked bonds in the second quarter of 2014. This is compared with outflows of £1.1bn in the first quarter.
This interest was further evidenced on Tuesday when the government’s £5bn sale of index-linked bonds maturing in 2058 was oversubscribed, even though it was the first time the debt management office priced linkers at a negative real rate.
According to the Financial Times, Deutsche Bank, Goldman Sachs, Morgan Stanley and RBS priced the bond at minus 0.073 per cent. The bond will pay investors a coupon of 0.125 per cent and has a return linked to the retail price index. More than 100 investors put in orders totalling more than £14bn.
A fixed income manager I spoke to this week told me that floating-rate assets have also become of interest to many schemes looking to hedge against interest rate rises. The manager’s multi-asset credit portfolio is now overweight in variable rate fixed income.
According to data from MandateWire, European institutional investors ploughed £13.5bn into fixed income in Q2 of this year compared with inflows of £2.5bn in Q1, but still significantly down from the £19.4bn invested in the last quarter of 2013.
The data also show investors were diversifying fixed income portfolios. Along with the inflows and outflows seen in the below graph, institutions invested £22m in loans in the second quarter and £208.9m in credit.
With governor of the Bank of England Mark Carney hinting that rates will rise in November, this looks to be the start of a trend for schemes.