UK - Pension fund demand is behind a tenfold increase in inflation-linked swaps activity at Barclays Capital, executives say.

The rise is being fuelled by pension funds' taking action to minimise their own liabilities, the investment bank said.

"We're probably doing 10 times more in inflation swaps than we were doing two years ago," said Alan James, Barclays Capital's head of inflation-linked research.

"The demand side, most of the time, is from the pension sector," he said, adding: "They're doing it to hedge their liabilities."

"People are becoming much more comfortable with complexity in this market," said his colleague Ralph Segreti, global inflation product manager.

James told a briefing for journalists that investors were now using inflation swaps like beta sources, then using an overlay of, say, alternatives or commodities, to generate alpha.

"Pension funds are looking for greater returns," he said.

James pointed out that almost all the new supply of long-dated bonds is now going into the swaps market. He cited UK utilities firms issuing 50-year bonds where corporate treasurers were taking advantage of current market conditions and the need for pension funds to match liabilities.

James said: "Even though we've seen massive issuance the demand is there."

But still only 3% of the pension sector liabilities were covered, suggesting companies' issuance of long-dated bonds could increase. One question was the extent to which utilities firms had met their financing needs with bond issues. Supermarkets could be next to issue long-term bonds in a big way, reporters were told.

Barclays ran a series of conferences in Europe recently and surveyed the attendees, which included pension funds, hedge funds, asset managers and central banks. Over 60% said they would use inflation-linked swaps.

The survey also found that 37% of attendees expected equities to be the best performing asset class in the next 12 months.

Alternatives (private equity, hedge fund and infrastructure) were backed by 25%. Other asset classes: inflation-linked bonds (6%), nominal debt (13%, mortgage-backed (1%), commodities (12%0. real estate (3%) and cash (1%).

Moving on to what is the biggest issue facing markets in the remainder of the year, just 6% said it was the global pensions situation - this was now seen as much less of an issue.

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