BALANCE SHEET HEDGING

Recent Themes and Activity

April 3rd, 2024

Monday's ISM data kicked off a sharp move higher that has pushed several parts of the swap curve back near YTD highs. The swap market is now implying fewer than 3 rate cuts in 2024 after pricing in as many as 7 earlier this year.

We previously described how depositories with existing pay-fixed swaps can purchase floors to protect gains / hedge income from rate cuts... but what about institutions looking to establish additional upside rate protection?

For institutions exposed to a "higher for longer" scenario, consider combining a pay-fixed swap and a floor to create a cap-like hedge:

Adding optionality to the balance sheet usually comes at an initial expense to earnings, but given the inversion in the swap curve, income from the swap is expected to exceed the amortized premium expense of the floor in 2024.

Combining a swap and a floor doesn't reduce total premium expense. It simply creates a backloaded amortization schedule that makes the combined structure accretive to earnings in 2024.

Below we've included indicative pricing for a range of terms and strikes. As always, feel free to reach out with any questions or comments.

*Pricing indicative as of 4/2, provided for illustration purposes only and subject to change

Revisit some of our recent publications and webinars:

Contact Us

Desk: 212-651-9050

Isaac Wheeler

Managing Director

Balance Sheet Strategy

iwheeler@derivativepath.com

Jordan Wank

Associate

Balance Sheet Strategy

jwank@derivativepath.com

Von Garces

Head of Hedge Accounting

vgarces@derivativepath.com

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