October 28, 2008 / 10:05 AM / 9 years ago

Insurers and pensions seen piling into long US swaps

NEW YORK (Reuters) - Insurers and pension funds, haemorrhaging from the global stock sell-off, have piled into long-dated U.S. interest rate swaps as a way to match expected liability payouts, according to J.P. Morgan Securities.

The analysts estimated insurers and pension funds have scooped up $50 billion (32 billion pounds) in 20-year swap equivalents in October, as U.S. stocks ended at 5-1/2-year lows last week on recession worries and forced liquidation.

"As equities have sold off, there has been unusually heavy receiving in swaps in the long end this month from pension funds and insurance companies managing their asset-liability mismatches," they wrote in a research report published late Friday.

They attributed some of the initial money into long-dated swap contracts to pension funds replacing trades with Lehman Brothers after the U.S. investment bank filed for bankruptcy last month. However, the volume has exceeded "well beyond" these Lehman-related trades, they said.

With the Standard & Poor's 500 index .SPX falling 40 percent this year and prospects of cuts in short-term interest rates from central banks worldwide, a number of pension funds and insurers rushed to replace their depleted stock exposure with long-dated fixed-income assets.

Such a move should ensure they generate enough income to pay for future payouts, J.P. Morgan analysts said.

They added insurers and pensions have preferred swaps and futures over cash bonds because they do not require an outlay of cash.

Reporting by Richard Leong; Editing by Tom Hals

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