The Hellenic Railways Organization is considering synthetically shortening the duration of its debt portfolio to gain exposure to short-term interest rates. The move follows several similar efforts by high profile organizations, such as the Agency France Trésor, which started reducing the average duration of its debt in March 2001.
Panos Koumandos, general director in finance in Athens, said it has over EUR1 billion (USD866 million) of long-term debt on which it pays an average fixed rate of over 5% and is looking to see if it can restructure this so it pays a lower interest rate. "Interest rates are less than 2% and we want to see how we can take advantage of that," noted Koumandos.
The standard method for shortening the duration of a bond portfolio is to receive fixed in a long-dated swap and pay fixed in a short-dated swap. This is the synthetic equivalent of buying back the long-dated bonds and issuing short-dated bonds, but it allows the organization to keep its debt issuing program in place. Meyrick Chapman, derivatives strategist at UBS in London, said in typical curve trades the issuer enters two-year and 10-year or three-year and 8.5-year swaps.
The trade makes sense as an asset and liability management strategy if the issuer believes that on average short-term rates will be lower than long-term rates. As a short-term trade it makes sense if the issuer predicts the yield curve will steepen. Chapman estimates there is likely another 25 basis points of steepening left in the curve.
The downside, however, is that swings in interest payments can be much greater because short-term rates are more prone to fluctuation, according to Chapman.
