After last week’s rate cut, most pundits and media outlets have been breathlessly focused on the aggressive path the market has priced in for the FOMC over the next twelve months.
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BALANCE SHEET HEDGING

Hedging Strategies for a 3% World

September 25th, 2024

After last week’s rate cut, much of the market's focus has been on the aggressive path priced in for the FOMC over the next twelve months.

While the very front end of the rate curve has captured headlines, we encourage clients to look beyond the noise and focus instead on the swap curve from September 2025 onward:

strategies for 3 - 1

Depositories eager for a return to ~3% overnight rates can lock in that benefit with a forward-starting pay-fixed swap. Swaps can be paired against pools of residential mortgages, AFS securities or even future borrowing needs. A 1-year forward starting 4-year swap can be executed at near 3% rates for the first time in years:

strategies for 3 - 2

Option-based strategies such as zero-cost collars also appear attractive and can be structured to avoid expense until the Fed reduces rates below 2.25%:

strategies for 3 - 3

Hedging Against Declining Rates

For institutions vulnerable to falling rates, the market’s new “base case” of ~3% SOFR is not a welcome proposition. Is it too late to hedge? Not necessarily. But at this stage, those strategies are best thought of as a hedge against a deep recession. Floors are one such strategy, and can protect against a scenario where SOFR declines to 2% or lower:

strategies for 3 - 4

Register for our upcoming webinar:

  • Unlock Hedge Accounting Success: Portfolio Layer Method Best Practices

Revisit for our recent pieces:

  • What Does a Fed Rate Cut Mean for My Hedging Program?
  • Hedging Strategies from Q2 2024
  • Balance Sheet Hedging Update - 8/7/2024

Reach out with any questions or for pricing on specific structures.

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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