Europe's fixed income markets are getting a lot more attention than its equity markets these days, according to Greenwich Associates' 2005 European fixed income research study.
The study found that fixed income assets under management in continental Europe and the U.K. grew 23% from 2004 to 2005.
Greenwich found that European institutions greatly increased their holdings of fixed income products such as investment grade bonds, ABS as well as high yield and emerging market bonds. Specifically, ABS and high yield holdings both increased by 30% over the past year.
One reason behind this drastic shift to fixed income is that new mark-to-market accounting rules have begun to take hold across Europe, and specifically in the U.K., Greenwich reported.
"These new rules have prompted corporate pension plans to shift additional assets from equities to fixed income in order to minimize the risk that even normal levels of market volatility can pose to corporate balance sheets under mark-to-market regulations," Greenwich reported.
Managed U.K. pension institutional assets investing in equities declined from about 70% in the late 1990s, to 63% in 2003 and 61% in 2004, Greenwich consultant Woody Canaday reported.
Greenwich's research study also found that despite fixed income assets growing significantly from 2004 to 2005, fixed income trading volumes in continental Europe and the U.K. only grew 3%. This occurred as fixed income electronic trading platforms failed to attract a significant amount of new users, but overall electronic trading volume increased substantially. There was also an increase in dealer relationships in less liquid fixed income products, including high yield and emerging market bonds.
The study also revealed that European institutions are increasing their use of credit products and interest-rate derivatives. In addition, compensation for European fixed income professionals at buy-side shops increased 11% in 2004.
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