Global yields have moved sharply higher over the past year, increasing the cost of debt finance, but that doesn’t mean borrowers have missed the opportunity to hedge in a cost-effective manner.
A strategy that borrowers are currently employing is to start their hedges in the future, typically 6 or 12 months forward, where interest cost is currently significantly below current interest rate resets.
This enables borrowers to hedge against future rate rises at costs below that of current interest rate resets, while accepting interim risk between now and the effective date of the hedge.
This strategy takes advantage of the current divergence between the market forecast for future interest rates and current central bank projections.
This opportunity is available to borrowers because yield curves (across many currencies) are “inverted” which means that yields in the longer term are lower than the shorter term. This is due to recent signs of softening inflation and investor concern around the possibility of recession, which is fuelling expectations of future rate reductions, despite continued hawkish central bank statements.
Borrowers with interest rate exposure who are concerned about locking in protection at current rates should consider the use of future starting hedges to lower their cost whilst securing longer term protection.
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