LDI funds cool on zero-coupon swaps as price jumps
Pension funds say the cost of their traditional zero-coupon interest rate swaps surged six-fold this year, as the return of interest rate volatility exposed hidden basis risks in dealers’ books
The basis between UK interest rates and swap discount rates is being blamed for a six-fold surge in the cost of interest rate hedging for UK pension funds. Some are considering changing ages-old hedging policies, while banks, which have to manage the risk between the two rates, are encouraging the switch.
The turmoil has played out in private conversations between dealers and their clients, reaching fever pitch during the second quarter of this year, and banks still refuse to discuss it – four
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