Interest Rate Futures

Don’t let central banks push you around.

Both corporations and private investors can be negatively affected by changes in interest rates. When corporations have floating-rate liabilities on their balance sheets, rising interest rates mean higher debt payments. For investors, rising interest rates translate into falling bond prices, creating a loss in the value of the fixed income portion of an investor’s portfolio. But bondholders can also be at risk if interest rates fall, because this introduces reinvestment risk to the portfolio. Reinvestment risk is the risk that funds received from bond interest payments and maturing bonds must be reinvested when rates are lower and therefore the funds will earn a lower return.

Some of the interest rate futures listed on US and Canadian exchanges are based on interest rate securities, such as Treasury Bills, bankers’ acceptances, and bonds. Others are based on market rates for deposits and loans, such as repo rates and Eurocurrency rates.

The Burak Hannon Brojde Group works with both corporations and individual investors to assess which particular interest rate instrument their portfolios of assets and liabilities are sensitive to and help devise strategies to protect against adverse movements in these instruments.  We can also advise investors wishing to speculate on the direction of interest rates on what course of action will be most likely to benefit from central bank interventions.