Should You Act Now to Lock in Lower Interest Rates?

Published:

by Anita Sherman, CPA and Larry Greenwalt, CPA
Interest rate swaps have been used for a number of years to hedge against rising interest rates. In the last several years, this technique has become more commonly used with mid-sized companies. SWAPS are useful in hedging against intermediate and long term loan interest rate risk, which makes SWAPS ideal for owner occupied properties and lines of credit that tend to have a certain level of “permanent” borrowings.

Hans Michael Hurdle of PNC Bank, noted that we are experiencing a 60 year low in 10 year Treasury yields. In order to stimulate the economy, the Fed has been able to keep interest rates artificially low. Hans believes that as our economy continues to gradually improve, and if there is a Europe resolution, interest rates will pop up. There may be a 3 to 12 month window in which to take advantage of the current low rates. The market consensus is that LIBOR rates will increase over the next 5-6 years, and LIBOR is the basis used by most banks to determine their pricing.

We know that three or four years ago, it seemed as though rates were low and could only go up. A number of companies did employ swap arrangements, and in hindsight wished they had not. One way many of them mitigated this somewhat was to hedge 50% of the loan. At this point however, you need to ask yourself what the greater risk is-that rates could go lower, or they could go higher? We think it is time to take a longer term view. We encourage you to begin a dialogue with your banker about this. Have them do an analysis of your situation and discuss the pros and cons of hedging your interest rate risk.

There are two primary reasons you would not want to lock in your rates in the near future:

  1. You do not believe that interest rates will go up much over the next 5 years, or
  2. You are uncomfortable locking into your present banking situation.

Above all, remember this, doing nothing is, in this situation, making a decision. You want it to be the right decision, and the only way to make a good decision is to have the information and knowledge to do so. We encourage you to initiate that dialogue with your banker. We’d be happy to participate in that discussion at no cost to you.