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Negative interest rates are starting to get priced in by investors as money-market contracts linked to Base Rate in December 2020 and beyond have fallen below zero.
The Bank of England has previously expressed their reluctance to take rates below zero. However chief economist, Andy Haldane, said that the central bank was looking more urgently at negative interest rates as well as buying riskier assets under the central bank’s bond-purchase programme.
“The economy is weaker than a year ago and we are now at the effective lower bound, so in that sense it’s something we’ll need to look at – are looking at – with somewhat greater immediacy,” Haldane told the Daily Telegraph over the weekend.
With investors pricing in negative rates without clear signals from the Bank of England, this disconnect has made hedging cheaper in the short to medium term. The 5 year swap rate dropped as low as 0.23% on Monday.
The current pandemic has seen the 5 year swap rate fall to its lowest level in history:
As an indication, a 5 year interest rate cap with a notional of £5 million and a strike rate of 1.50% had a mid-market price of £26K at the start of the year. A cap with the same profile today has a mid-market price of £12K (more than a 50% reduction).
Whether you have an existing hedge or would like to enter into hedging, we would be able to help to manage your interest rate risk. We can also assist with helping you understand how negative interest rates may affect your loan and/or hedging.
You may find it helpful to read our FAQ article which covers loans and hedging.
Please get in touch with any questions you may have and a member of our team will be able to assist you. You can reach us on 0207 183 2277 or at info@vedantahedging.com.
