Hedging Strategies from Q2 2023

Q2 2023 Hedging Review: Adapting to Rising Rates

Isaac Wheeler
Isaac Wheeler
Head of Balance Sheet Strategy
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“Higher for longer” characterized the price action in rates markets, and it was a view embraced by financial institutions as they executed their hedging programs in Q2.

More banks spoke about hedging against rising rates than falling rates on their earnings calls for the first time in years, extending the trend we first observed last quarter.

This shift towards pay-fixed swaps and other upside hedging strategies isn’t a surprise; the median bank benefits significantly less from higher rates than they did historically, and many institutions have become liability-sensitive. Banks that hedged highlighted the income accretive nature of pay-fixed swaps, income that was particularly valuable as margins come under pressure.

While the median bank has become much more exposed to rising rates, little has changed with respect to exposure to declining rates, and nearly 15% of banks in the S&P Regional Banking Index now disclose two-way exposure to both rising and falling rates.

As we move through the third quarter, we expect to see an increase in downside hedging as we hit multiyear highs in the swap market. While receive-fixed swaps remain challenging to execute because of their initial negative carry, options strategies like interest rate floors look comparably attractive.

For a more in-depth look, we’ve compiled a complete list of hedging commentary from second 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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