It remains unclear exactly what the future holds for interest rates, but what is clear is that borrowers will likely continue to face a high-interest-rate, high-inflation environment for the immediate future. Learnings from the latest Federal Open Market Committee (FOMC) meeting imply that current elevated inflation could have rates holding on for longer than expected. With a future path being dependent on global economics and the latest data, we believe the Federal Reserve (Fed) will likely remain cautious on the inflation front and will need to see several months of deceleration before implementing any sort of easing.

While uncertainty in the level of rates is not new territory, as borrowers have seen yields move higher with larger daily changes in rates since 2022, it continues to create challenges for both individuals and businesses seeking to borrow.

With only mild signs of inflation reduction and with the next rate cut not expected until September, there are several interest rate hedging strategies that may help protect borrowers during unpredictable interest rate environments and volatile markets.

Hedging Strategies Can Help During Periods of Uncertainty

Adam Smith, managing director for PNC’s Derivative Products Group, states that increased volatility has been created by the market overestimating the extent and timing of rate cuts, thus, making it difficult for borrowers to forecast their interest expense. This is when hedging can add value.

“Hedging can alleviate uncertainty that many borrowers are experiencing today, so now is a good time to consider hedging given all of the volatility,” said Smith. “With the yield curve inverted, hedges can offer immediate interest rate savings. When a borrower executes a hedge, the rate of the hedge is based on the market expectations at the time the hedge is executed, allowing the borrower to lock in those rate expectations for a greater certainty of cash flows.”

Interest rate hedges are customizable so there is no shortage of hedge structures or strategies to consider — and borrowers are not limited to just one approach. One or more can be utilized to help create cash flow stability based on unique situations and goals. Some structures, such as interest rate swaps and interest rate collars, can protect borrowers against higher floating rates with no upfront premium. Continuous dialogue with a derivative products partner, can better equip borrowers with a tailored solution to meet their specific goals.

Webinar Replay: Learn More About Hedging Strategies and Implementation 

In a recent webinar, representatives from the PNC Capital Markets Derivative Products Group provide insights into how individuals and businesses can prepare for changing monetary policy and hedge interest rate uncertainty.

Click here to log in and view: Preparing for a Change in Fed Monetary Policy

Ready to Help 

PNC’s Derivative Products Group can work with you to implement a capital structure and hedging plan that provides your desired balance of protection, liquidity, and flexibility.  Contact your relationship manager to learn more.

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