Friends Provident was one of the first pension schemes to undertake a large scale LDI hedge years ago.
Over the last 11 years real yields have fallen by 276 basis points, an average of 25 basis points every year.
30 year nominal gilt rates have fallen while 30 year inflation break-evens have risen.
Equities and index-linked gilts have provided similar excess returns.
30 year USD swaps and EUR swaps have also fallen substantially over the last 11 years.
Friends Provident was one of the first UK pension schemes to undertake a large scale LDI hedge on 2nd December 2003. Since then UK pension schemes have moved to an aggregate hedge level of around 50% of funding ratios. In this CIO Report we look at what has happened to real yields, nominal rates, inflation expectations and equity markets over the last 11 years.
Real Yields Fall
When measured by the real yield on the 2035 index-linked gilt real yields have fall by 276 basis points between 2nd December 2003 and 2nd December 2014. This is an average fall of 25 basis points per year for 11 years.
Nominal Rates Fall while Inflation Expectations Rise
Since the 2nd December 2003 nominal 30 year gilt rates have fallen by 213 basis points while 30 year inflation break-evens have risen by 57 basis points. This shows that rates and inflation do not necessarily have to move in line with each other even over relatively long periods of time.
Real Yields Have Fallen Across the Curve
GBP real yields have fallen substantially across the curve over the last 11 years.
Equities Have Risen but So Have Index-linked Gilts
The last 11 years have been good for equities with the excess return on the MSCI World index being 5.43% per annum. However, over 5 year index-linked gilts have also been good performers with an excess return of 5.31% per annum.
Other Markets Have Fallen as Much as GBP Swaps
30 year GBP nominal swap rates have fallen by 253bp over the last eleven years. 30 year USD nominal swap rates have fallen by a similar amount, 251bp, while 30 year EUR swaps have fallen by even more, 345bp.
Please note that all opinions expressed in this blog are the author’s own and do not constitute investment advice. Click here for full disclaimer.