The volatile environment for interest rate hedging has persisted as we approach the end of the first quarter. Last week's inflation data pushed swap rates 25+ bps higher, and that volatility appears set to continue as Wednesday's FOMC meeting approaches.
We've seen an increase in hedging volumes in recent weeks, concentrated in two strategies:
Floors or swap-to-cap conversions to reduce downside risk associated with existing in-the-money swap portfolios.
Restructure Existing Pay-Fixed Swaps
Purchasing new floors could be the most earnings-friendly way to limit downside exposure on existing pay-fixed swap portfolios.
For portfolios of pay-fixed swaps currently generating ~200+ bps of positive carry, consider earmarking 19 bps to pay for a 2.50% floor. The combination of an existing swap + a floor limits losses and swap expense should rates fall.
Alternatively, you may consider unwinding swaps and replacing with an interest rate cap to achieve a similar profile.
*Pricing indicative as of 3/18 and subject to change
Hedge Future Funding Needs
With nearly 4 rate cuts still priced in over the next twelve months, clients continue to view current swap rates as an attractive entry point for new pay-fixed swaps.
We've also seen interest in forward-starting swaps to lock in future borrowing costs as clients return to a well known strategy- swapping rolling advances or CDs:
*Pricing indicative as of 3/18 and subject to change, based on div. adjusted 1m FHLB advances
Revisit some of our recent publications and webinars:
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