Banks Seen Entering Huge Swaps Positions To Ready Liability Hedging
GlobalCapital, is part of the Delinian Group, DELINIAN (GLOBALCAPITAL) LIMITED, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 15236213
Copyright © DELINIAN (GLOBALCAPITAL) LIMITED and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
Derivatives

Banks Seen Entering Huge Swaps Positions To Ready Liability Hedging

Some of the biggest derivatives houses have recently been piling into interest-rate swaps in which they receive the 30-year fixed rate to position their books for an expected surge in money managers hedging their long-dated liabilities. Swaps traders estimated USD4-6 billion (notional) of additional business has gone through the London market in the last month. Morgan Stanley, UBS Warburg and Merrill Lynch were reportedly the most active. Officials at the firms declined comment.

Money managers and insurance companies are under pressure from swooning equity markets and historically low interest rates and are therefore expected to look for relief in some kind of structured long-dated fixed income instruments, bankers explained. Therefore derivatives houses want to receive the 30-year fixed rate via interest rate swaps because the anticipated long-end buying will drive yields down.

Since liquidity in straight 30-year swaps is low, in a typical trade a firm will receive fixed in the 30-year and pay fixed in the 10-year and then enter an offsetting position to cancel out the 10-year leg. Fund managers will then enter some form of a swap in which they receive the 30-year and pay a LIBOR-based rate.

In a recent example, Merrill is believed to have entered one of the largest such trades last week, according to rival bankers. In the EUR300-500 million (USD303-505 million, notional) swap, Merrill receives the 10-year swap rate and pays the 30-year rate.

The long end of the curve is under further pressure because European governments are looking to shorten the duration of their debt portfolios via the interest-rate swap market.

Related articles

Gift this article