One weak payrolls number later and the market has quickly priced in over 100bps of rate cuts through the end of the year. Swap rates have declined 30-50bps over the last week and some parts of the swap curve are ~75bps lower over the past month.
Here's an updated look at the forward curve after these moves:
The majority of our recent flows have come from depositories seeking to capitalize on cheaper upside hedging strategies:
Pay-fixed swaps converting pools of fixed rate assets to floating.
Forward-starting swaps to lock in rates on future funding needs.
Interest rate collars to achieve upside protection without exposure to the first ~300bps in rate cuts.
We've provided pricing for several standard structures below:
Indicative pricing as of 8/6/24
We’ve also helped several institutions extend existing swap positions. As an alternative to forward-starting swaps, institutions might consider a "blend and extend." This involves unwinding an existing swap and executing a new, longer-dated hedge. While the overall economics are identical to a forward-starting hedge, a blend and extend offers an immediate earnings benefit:
Unsurprisingly, downside hedging strategies like floors and receive-fixed swaps have become more costly. Although trading volume has decreased, several publicly traded banks highlighted the implementation of these strategies during Q2 earnings calls. Recent market moves underscore the importance of being prepared to implement such strategies should pricing improve.
Reach out with any questions or for pricing on specific structures.
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