Research on Interest Rate Policies

The European Treasurers' Peer Group today released a survey on IR policies for corporates. High level conclusions:

• Corporates are generally inclined to adopt an active (i.e. adjusting to market expectations) hedging strategy on IR. The main reason is that it is hard to define what the corporation’s IR risk actually is.
• The board and management often have an opinion of expected interest rates.
• Natural hedges means matching interest duration with the underlying business with e.g. large part of floating rates since low rates are pro-cyclical to low earnings or a portfolio of long term investments with large portion of fixed rates to match.
• The interest rates are extremely low in a historical perspective and inflation is expected to rise. Several respondents assumed it is good time to change to a higher ratio of fixed rates.
• The increased counterparty risk makes it difficult to hedge long term ÍR with derivatives. With what financial institutions are you prepared to enter a 10 year IR swap?
• Banks sometimes opt on a certain interest hedging policy.