Last week's 25 basis point interest rate hike in Australia took derivatives professionals by surprise and will likely lead to a massive jump in volumes in the coming weeks. Gary Vassallo, head of derivatives at Macquarie Bank in Sydney, predicts there will be a 25-30% increase in volumes in the next few weeks. "With the foreshadow of further rate rises, we should get interest for caps and fixings," he said.
Alastair Wait, head of fixed income at Deutsche Bank in Sydney, agreed that there will be a substantial increase in trading and said in addition to swaps there will be strong demand for floating rate structured notes and hybrids. "These are now more attractive products," he added, explaining that investors will plunge into such structures because a rate rise has materialized and more are likely on the way.
"Most people expected [the rate rise] to happen in December rather than November," said Vassallo. The Reserve Bank of Australia bumped up the benchmark rate from 4.75% to 5%. Rates had been stable for 12 months in Australia. The market has already priced in two additional 25 basis point rises for the coming months, according to Wait.
