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