Bank regulators remind lenders to hedge their interest rate risk.
An interagency group of the country’s main bank regulators released a short paper yesterday on best practices in hedging interest rate risk. The timing (and prosaic nature) of the statement spurred some to consider whether regulators expect interest rates to climb soon.
While the statement makes no forecasts of rate movements itself, and the Kremlinologists who scrutinize the Federal Open Market Committee have found no evidence that the Fed will soon crank up short-term rates, a reminder to lenders to do what is a key part of their day-to-day jobs seems a bit suspicious. Add to that the decision to allow banks to invest excess reserves in, essentially, government CDs and the Fed’s tinkering with its reverse-repo machinery, and its enough to convince conspiracy theorists that these are telegraphed signals that short rates are on their way up.
Of course, the Fed may continue to ZIRP its way through the rest of the year, but that wouldn’t keep long-term rates from rising. The ballooning deficit, rising economic recovery expectations and worries about China’s ability to continue to snap up Treasury bills has made the yield curve sharpen steeply in recent months. Even if the FOMC continues to sit on its hands, it might be nonetheless wise for lenders to double-check that their rate risk management is up to snuff.