Standard Life Investments

Inside Global Insurance Investment

Unfunded gilt exposure and Matching Adjustment asset strategy

It can pay to shop around when seeking unfunded gilt exposure.

April 2016

40-year Swap Spread (bps)

Source: Bloomberg as at 8 February 2016

A Matching Adjustment (MA) asset strategy may involve the use of interest rate derivatives to extend the duration or enhance the cashflow-matching accuracy of the MA asset portfolio. Often these derivatives are held on an unfunded basis to maximise the current physical allocation to credit assets.

Recent unusual gyrations at the long end of the gilt-swap spread curve have made interest rate receiver swaps seem a relatively expensive route to duration-extension (see Chart 1). In such market conditions, it is natural to explore ways of obtaining unfunded gilt exposure. Therefore, many MA investment strategists are actively considering the potential use of gilt total return swaps and forward gilts.

The insurance team at Standard Life Investments manages MA assets for several insurance groups. It has been working closely with our clients to offer a range of solutions that meet their evolving needs in this complex area.