The state Treasury of Bundesland Sachsen-Anhalt, a state in Eastern Germany, is set to enter a EUR100 million (notional) interest-rate swaption if one-year futures on 10-year German Bunds trade above 109% of their issue price in the secondary market. It will use the swaption to hedge interest-rate risk on a EUR100 million bond the German regional authority plans to issue in the second half of the year. It has yet to choose counterparties for the swap, according toAxel Gühl, treasurer at Ministerium der Finanzen des Landes Sachsen-Anhalt.
The Bundesland is considering entering the swap now because it fears interest rates may rise before it comes to market, Gühl explained. The regional authority plans to issue a fixed-rate bond, but is considering entering a swaption in which it both pays and receives a fixed rate. Gühl reasoned that if Bund futures rise--showing an expectation in the futures market that rates will fall--the Bundesland will be able to receive a more attractive fixed rate in the swap. The authority will be fully hedged should rates actually rise, he added.
If the Bund future goes above 109% the Bundesland will enter a swaption in which it pays the current fixed rate and receives a fixed rate equal to six-month Euribor minus 4bps at the time the swaption is exercised. This will lock the state into current levels of funding even if rates rise. Gühl thinks interest rates may rise if there is a recovery in the stock markets and inflation becomes a concern again. The 10-year Bund future was trading at 108.48% of its issue price on Friday.
