UK institutions' money holdings are at their lowest level since 2006, implying less fire-power to buy gilts and other assets.
Insurance companies' and pension funds' holdings of bank deposits and short-term money market instruments stood at £140 billion in September 2010, down from a peak of £180 billion in September 2008 and the lowest since June 2006, according to the Office for National Statistics.
The liquidity ratio (i.e. money holdings as a percentage of the value of financial investments) was 5.6% in September, down from an 18-year high of 8.6% in September 2008 and the lowest since March 2002 – see chart.
Institutions generally target a stable proportion of money in portfolios over the medium term, increasing investment in markets when the liquidity ratio is high and vice versa. Historically, the level of the ratio has been positively correlated with subsequent real equity market returns, as discussed in a post in early 2009.
At 5.6%, the liquidity ratio is below its average of 6.4% since 1987. Institutions have been directing the bulk of new investment into gilts recently, buying £15 billion in the year to September. Weaker institutional demand could add to upward pressure on gilt yields from a slowdown in overseas buying – see post last week.
