Risk appetite on the rise in U.S. capital markets: Fed survey

By Pedro Nicolaci da Costa

WASHINGTON (Reuters) - Hedge fund and derivative investors are taking on more risk as aggressive monetary easing and an improving economy boost demand for higher-yielding securities, a Federal Reserve survey showed on Thursday.

The Fed's Senior Credit Officer Survey, which supplements data on the banking sector with some insights into activity in funding markets for asset-backed securities and over-the-counter derivatives, showed one in four respondents reported an increase in hedge fund leverage, or debt used to make financial bets.

"Nearly one-half of dealers, on net, reported an increase in risk appetite of their most-favored hedge fund clients, and about one-fourth of respondents, on balance, noted an increase for other hedge funds and insurance companies," the Fed report said.

Market liquidity for sectors such as commercial and residential mortgage bonds, as well as consumer asset-backed debt and high-yield corporate bonds, has improved over the last three months, the survey found.

With financial conditions, improving, firms are increasingly fighting for more favorable terms in their fundraising, the Fed said.

"More than one-fourth of respondents reported an increase in the intensity of efforts by nonfinancial corporations to negotiate more-favorable price and nonprice terms," the report said.

Federal Reserve Governor Jeremy Stein said in February he was concerned about possible signs of overheating in certain corners of financial markets, particular riskier corporate bonds.

The Fed's aggressive monetary easing, which currently entails monthly purchases of $85 billion in Treasury and mortgage securities, is in part aimed at pushing investors to take on more risk to spur economic growth. But some economists also worry it could fuel bubbles.

(Reporting By Pedro Nicolaci da Costa; Editing by Neil Stempleman)