Trends in Swap Term

Borrowers are choosing to hedge for shorter periods of time.

Recent trends show that borrowers are opting to hedge interest rates for shorter durations. The average swap tenor for borrower swaps during the first few months of 2025 has been 4.6 years. This is a 6% decrease compared to an average swap term of 4.9 years in 2024.  In fact, there has been a gradual decline in swap term over the past several years, with the average swap term declining by 48% since 2020, when most borrowers hedged for an average of 9.1 years.

The current interest rate environment may be contributing to shorter hedging terms.

Banks and borrowers alike have expressed that, unlike years prior, they do not have a solid grasp on the direction rates will trend. Changes in monetary policy, trade policy, implementation of tariffs, and disparate economic data have contributed to conflicting outlooks on interest rates. The recent decline in borrower swap term may indicate that while borrowers value rate certainty, they are reluctant to commit to longer hedges in a rate environment with so many unknowns. Under current market conditions, borrowers are balancing fixed rate stability with the freedom of flexibility.

Banks can use recent swap trend data to structure hedging solutions that meet current borrower needs.

In this rate environment, banks can use interest rate swaps to offer borrowers short-term rate certainty while still affording them future flexibility. For example, a bank could offer a borrower a ten-year term loan with a three-year swap. The borrower would have a known fixed rate for the initial three years of the loan. If rates decline during the initial three years, the borrower can execute a forward-starting swap to lock in the back seven years at a lower rate. Alternatively, the borrower can wait until the initial swap matures, evaluate the rate environment at that time and determine their preferred strategy. Since the loan is for ten years, the borrower does not have to navigate loan or security documents when the initial swap matures. Instead, the borrower can focus on adapting their hedging strategy without worrying about credit availability.

This type of adaptable hedging arrangement provides borrowers with immediate rate protection while maintaining future flexibility. In an increasingly competitive banking environment, financial institutions that understand and utilize swap data can create hedging solutions that meet current demand and stand out from competitors.

At Derivative Path, we believe in enabling banks and borrowers with market-relevant, data-backed strategies that fit their hedging goals; please feel free to reach out to [email protected] for more information.