Chatham Financial poll sees rates rising, Fed as most responsible for current volatility.
What will happen to the 10-year-Treasury-bond rate by year-end? When do companies plan to address interest-rate risk? What impact do companies anticipate the accounting standard setter’s proposed revisions of hedge accounting to have on their hedging programs? What sources of market volatility are companies most concerned with presently?
Chatham Financial interspersed its recent “Market Update: Are You Ready For More Volatility?” webinar with those questions. The bulk of responses from the 382 participants fell within the realm of the expected, unlike interest rates which, as described by Chatham executives, performed far outside market expectations, although current projects may be close to the mark.
Approximately two thirds of corporate finance executives participating in the webinar responded that they anticipate rates increasing slightly by year-end. That’s far less than those expecting a rise last year.
“That question is really on everyone’s mind right now. Many of our clients want to talk about rates and where they are going,” said Amol Dhargalkar, managing director, global corporates sector, at Chatham Financial.
An even bigger majority responding to the same question a year ago proved to be incorrect. A year ago, 94 percent of participants in Chatham’s market-update webinar expected rates to rise by the end of 2014, and instead rates fell 40 basis points, noted Gavin Duckworth, director, global real estate, hedging and capital markets at Chatham.
Nevertheless, prospects currently may be stronger for a rate increase this fall. Mr. Duckworth said the Federal Reserve Board pays close attention to payroll numbers, the monthly year-over-year consumer expenditure growth rate, and US inflation rate, and all three measures have been in the vicinity of where the Fed wants them. Nevertheless, volatility still abounds. After relatively strong payroll numbers in May, for example, when 282,000 jobs were added, members of the Fed’s Federal Open Market Committee (FOMC) noted that the central bank was making progress toward its goal of maximum employment.
“So what happened? Rates took off,” Mr. Duckworth said. “Couple that with significant issuance of US corporate debt that was putting pressure on Treasury rates, and within two weeks swap rates were up 34 basis points.”
In terms of where rates might be headed this year, 15 of the 17 anonymous rate forecasts by the FOMC members, illustrated in their quarterly “dot plots,” are for the three-month Libor rate to be as high as 1 percent this year and by the end of next year as high as 3 percent, with the 2016 average over 1.5 percent. The market projection for three-month Libor rates is well below the FOMC member average over the next several years, but, as Mr. Duckworth noted, that has typically been the case. Fed Chairman Janet Yellen has said an economy evolving as expected should result in a rate increase this year, with gradual increases subsequently.
Chatham’s second poll question asked participants when they would address their interest-rate risk, and most said they were comfortable with their current interest-rate strategies. Chatham specializes in advising clients’ on mitigating financial risks, and given many participants were likely to be clients the result was unsurprising.
Thirdly, the Kennett Square, PA-based Chatham queried about the impact on their hedging programs that participants saw from FASB’s proposed changes to its hedge accounting standard. Also unsurprising, given a final standard is unlikely to emerge until the second half of 2016, few participants had considered the issue in detail.
“One point of interest for companies thinking about adjusting their fixed-to-floating mix is that hedging fixed-rate debt back into floating may become easier to do,” Dhargalkar said. “There might be a bit more flexibility around the tenors of hedgers you can put in place.”
The final question posed to webinar participants asked about the sources of market volatility currently of most concern to them—the FOMC interest rate decision; dollar strengthening, commodity price volatility; regulatory changes in Europe, Canada and elsewhere; and changing accounting standards.
Most pegged the FOMC’s interest-rate decision as the top perpetrator.