Interest-Rate Swaps & Hedging
Using swaps to reshape balance-sheet rate exposure without trading the underlying assets.
An interest-rate swap exchanges one stream of interest payments for another — most commonly fixed for floating — on a notional amount. No principal changes hands.
The mechanics
- Pay-fixed / receive-floating: you lock in a fixed cost and benefit if floating rates rise. A bank with too many long fixed-rate assets might pay-fixed to shorten effective asset duration.
- Receive-fixed / pay-floating: the reverse — useful to extend duration synthetically or convert floating funding to fixed.
Floating legs reference SOFR (having replaced LIBOR).
Why hedge with swaps
Swaps let Treasury adjust the balance sheet's rate profile without selling assets or repricing customer relationships. They're capital- and relationship-efficient. Hedge accounting (fair-value or cash-flow hedges) governs how the P&L is recognized.
Swap spreads
The swap spread (swap rate − treasury yield of the same tenor) reflects funding, credit, and supply/demand. It's a key input to FTP and to relative-value decisions.
How PhxIQ relates
SOFR and the treasury curve on the dashboard are the reference rates underneath any swap. (A dedicated swap-spread panel is on the roadmap.)