Corporate and mortgage lenders, expecting long-term interest rates to break out of range and shoot up, are buying rate locks at a faster clip to hedge future floating-rate bond issues and extension risk. Overall levels of rate-lock trades could not be determined, but traders said they have seen a pickup in activity over the past few weeks because of pressure from the recent run-up in long-term rates combined with the cheapness of hedging a still relatively flat yield curve. "This is definitely something that is on the forefront of people's minds," said one structurer. "Every corporation I can think of has at least thought about it."
The Federal Reserve indication it is further than previously expected from ending tightening and the release of better-than-expected employment figures helped push the back end of the curve up to a two-year high April 7.
So far, traders said they are seeing most activity from corporates, but they expect mortgage lenders to pile in as long-term rates rise and are carefully watching the 10-year, 5.10% zone. As the housing market slows, rates rise and mortgage life extends, lenders will start to short Treasuries and swaps to cover positions. "As we approach 5%, it is starting to get interesting," said one interest-rate derivatives trader. "5.25% would break the long-term trend line. If we break 5.25%, the market will reach for it and long-term interest rates will shoot up." He added, "We're at a huge crossroads."
