Hedging Strategies from Q4 2023

The "Powell Pivot" was the primary driver of interest rate markets in Q4 of last year, sending swap rates plummeting as hopes for a soft landing soared.

Isaac Wheeler
Isaac Wheeler
Head of Balance Sheet Strategy
Strategies in action from Q4 2023 graphic

Six weeks into 2024, uncertainty still looms large, and interest rate volatility appears here to stay. How did banks respond to the shift lower in rates? For the first time in several quarters, divergences emerged between institutions with similar risk profiles. Some liability-sensitive banks seized the opportunity to add to rising rate hedges, relying on spot-starting pay-fixed swaps. Others trimmed existing hedge portfolios, citing internal expectations for Fed cuts.

If rate cuts are coming, did asset-sensitive banks accelerate their hedging against lower rates? Several did, but few used spot-starting swaps, unlike their liability-sensitive peers. Forward-starting swaps, floors, and collars remained popular as institutions looked to balance hedging needs with hedging expense.

Institutions also expressed cautious optimism around their customer hedging programs. Many banks saw an uptick in customer hedging fees in Q4, with hopes that the rebound will continue into Q1.

As we move through the rest of Q1, the urge to predict the path of rates, and treat the forward curve as a certainty is stronger than ever. Yet, we continue to see high-performing institutions hedging their balance sheets to reduce or eliminate the effect of interest rates on their earnings and capital. Read on for our complete summary of bank hedging commentary from this past earnings season. 

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.


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