Hedging Strategies from Q1 2023

Q1 2023 Hedging Insights: Navigating Interest Rate Volatility

Isaac Wheeler
Isaac Wheeler
Head of Balance Sheet Strategy
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We saw a pronounced uptick in references to hedging on Q1 earnings calls, both from banks who highlighted their risk management efforts and from the analyst community looking to understand bank exposures to rates:

Over 40% of the strategies discussed were hedges against rising rates, the highest percentage we’ve seen in two years. In part, this reflects the dynamic nature of interest rate risk. Our review of public interest rate risk disclosures found that the median bank is significantly more exposed to rising rates than in years past.

The inverted swap curve has also improved the attractiveness of rising rate strategies. That inversion allows liability-sensitive institutions to execute pay-fixed swaps that reduce risk to higher rates and increase immediate earnings. Those institutions hedged a variety of different exposures in Q1, but the majority chose to hedge AFS securities, while a subset opted to hedge new wholesale borrowings or fixed rate loans.

Asset-sensitive institutions were also subject to significant inquiry from the analyst community, no doubt spurred on by the fear that the Fed may reduce policy rates. The same market dynamics that create an attractive entry point for pay-fixed swaps make receive-fixed swaps less attractive. To avoid negative carry, we saw institutions execute alternative strategies, including forward-starting receive-fixed swaps and interest rate floors.

For a more in-depth look, we’ve compiled a complete list of hedging commentary from first-quarter earnings calls:

Isaac Wheeler
Isaac Wheeler

Isaac Wheeler is Managing Director and Head of Balance Sheet Strategy at Derivative Path, where he helps financial institutions structure and execute hedging transactions. Before joining the firm, Isaac spent five years at MFS Investment Management supporting execution of interest rate, currency and equity derivatives. He also spent time in MFS’s portfolio risk and technology teams. Isaac has a B.A. in Economics from Boston University.



The Term “Derivative Path” refers to affiliates, Derivative Path, Inc. and Derivative Path Hedging Solutions, Inc. Derivative Path, Inc. is headquartered in the State of California. Hedging advisory and execution services are provided through Derivative Path Hedging Solutions, Inc. (DPHS). DPHS is a Commodities Futures Trading Commission (CFTC) registered Introducing Broker (IB) and Commodity Trading Advisor (CTA) and member of the National Futures Association (NFA). This communication is for informational purposes only, is not an offer, solicitation, recommendation, or commitment for any transaction or to buy or sell any security or other financial product, and is not intended as investment advice or as a confirmation of any transaction. This communication is intended as an information resource only; Derivative Path has taken reasonable measures to ensure the accuracy of this communication. Any information contained herein is not warranted as to completeness or accuracy, and Derivative Path accepts no liability for its use or to update or keep any such information current. The content of this communication is subject to change at any time without notice. For additional information, you can read more here.

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