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Patrick Young, chairman of European financial consultancy Derivatives Vision, said investor apathy in the fixed income markets stemmed largely from the current low interest rate environment favoured by Europe’s central banks.
Young said: “With real interest rates effectively at zero and likely to stay that way, why would European corporates hedge interest rate risk using derivatives? Chief financial officers’ energies are directed elsewhere at the moment.
“Most companies are concerned with preserving the value of their current holdings, rather than hedging out new borrowing costs.
People won’t be concerned by rate risk until base rates climb towards 4 per cent or 5 per cent and central banks have effectively declared that to be at least a couple of years away.”
“On top of all this”, Young concluded, “Europe’s banks, which finance these trades, remain fairly risk-averse while deciding where they allocate resources. There is an acute focus on balance sheet risk at the moment, and what higher capitalisation requirements will mean for their derivatives holdings.”
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