Interest rate risk management

An interest rate forward curve for a market index (like SOFR) is, at a discrete moment in time, a graphical representation of the market clearing forward rates for that index.

These hairy chart graphs plot past LIBOR forward curves against the actual path LIBOR followed, showing that the forward curve has been a somewhat accurate predictor over the next six months or so...

An interest rate swap is a financial contract in which two parties agree to exchange distinct cashflows for a given period of time. Commercial real estate (CRE) borrowers often encounter these swaps as a component of bank lenders’ fixed-rate financing offerings.

An interest rate cap is essentially an insurance policy on a floating rate, most frequently SOFR. It has three primary economic terms: notional, term, and strike rate.

Banks use back-to-back swaps to meet borrower demand for long-term fixed-rate loans. With back-to-back swaps, the bank enters a floating-rate loan and a fixed-rate swap with the borrower and then a second, offsetting swap with a dealer counterparty.

An interest rate swap and floor is a combination of an interest rate swap with the purchase of an interest rate floor.

Last week was relatively muted in markets as a quiet economic calendar delivered mixed results and Fed speakers did little to dissuade current market expectations. Rates continued to move slightly higher as the market continues to coalesce around a slower pace of rate reductions.

The European Central Bank (ECB) cut their deposit rate on Thursday, while U.S. data releases reflected a strengthening consumer in the month of September. Fedspeak from Federal Open Market Committee (FOMC) governors throughout the week hinted at future rate cuts come their meeting November 7.