Leveraging hedging tools to stabilize commercial loans

Use hedging tools to stabilize loans and boost income in volatile markets.

At the beginning of this year, the futures market projected as many as five interest-rate cuts by the end of 2024. However, stronger-than-expected economic data has continued to emerge, causing market expectations for rate cuts to evolve. Although there has been a disparity between market expectations and Federal Reserve projections in months past, they are moving toward alignment, with year-end implied futures market Fed Funds rate currently at 4.93% and Federal Reserve estimate at 4.63%.

Using interest-rate swaps for commercial borrower lending

In the current interest-rate environment, credit unions involved in commercial lending may see a significant volume of loans resetting at higher rates in 2024 and 2025. This rate reset will stress borrowers’ cash flows and debt service coverage. Implementing a loan hedging strategy to mitigate interest-rate risk can prove invaluable in mitigating related credit stress.


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