U.S. pension funds are jumping into interest rate swaps this quarter. Traders said a combination of rising interest rates and continued poor equity performance is driving the funds to manage their liabilities through swaps rather than rely on their assets to grow.
"We have seen half a dozen or so large pension funds begin executing or authorizing execution of swap programs," said Robert Leary, a managing director with AIG Financial Products and marketer of over-the-counter products in Wilton, Conn. "We expect to see a significant increase in these type of swap programs by corporate pension funds as rates rise," he added. He has seen a flurry of activity since March, when funds began implementing strategies agreed upon by investment committees in first quarter meetings. Pension funds tend to use 10, 20 or 30-year swaps, he added. Rate swap programs piqued the interest of European funds last autumn in view of European Union accounting changes (DW, 10/1).