By Roger J Kerr
Corporate borrowers with new debt or increased debt to hedge should now consider minimal fixing in the five to ten year maturity bucket and maximise fixing in the three to five year time period where swap rates between 3.80% and 4.40% would appear to be very attractive.
Borrowers in this category should seek to be no more than 65% fixed, given the recent events and short-term rates staying lower for longer.
Borrowers with an existing high percentage of fixing, particularly in the five to ten year maturity bucket, should start to look at "shorteners" to restructure longer-dated swaps at higher rates into lower-rated shorter term swaps.
The ideal time to shorten the duration of swap portfolios is when 10-year swap rates have reached a high point and are expected to reverse downwards. Clearly, this is not the case currently with five to ten year swaps at more risk to increases from higher US Treasury Bond yields from here.
However, the steep upwards sloping curve from the reduction in short-term swap rates does offer the value to generate lower fixed rates in the one to five year maturity period.
Borrowers with existing fixed swap portfolios could not have predicted this "event risk" which will keep floating rates lower for much longer in 2011; however they can take the opportunity to lower their weighted-average debt funding costs by shortening their duration.
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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
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