What is interest rate risk?

Short-Term Interest Rate Exposure

Exposure to short-term rates can significantly affect various aspects of your company's finances, including floating rate loans, lines of credit, deposits, construction loans and short-term debt used to finance current assets such as inventory and receivables. Floating rate indexes, like SOFR (Secured Overnight Financing Rate) and Prime, closely track changes in the Federal Reserve's target Fed funds rate, which serves as its key monetary policy tool. As the Fed adjusts rates to maintain economic stability, your borrowing costs can change quickly, directly impacting your bottom line.

It's essential to closely monitor your company's short-term interest rate exposure and take proactive measures to mitigate potential risks. This may involve reviewing and adjusting your financing strategies, such as considering fixed-rate options for a portion of your short-term debt or maintaining adequate cash reserves to buffer against sudden rate increases. Regularly assessing your company's sensitivity to short-term rate fluctuations can help you make informed decisions and maintain financial stability.

Long-Term Interest Rate Exposure

Long-term rates play a crucial role in financing assets like commercial real estate, manufacturing plants and equipment, which are typically financed on a long-term, fixed-rate basis. Managing your exposure to long-term rates is essential to ensure predictable cash flows and minimize the impact of interest rate volatility on your company's financial health.

To effectively manage long-term interest rate exposure, you can employ strategies such as securing fixed-rate loans or utilizing interest rate swaps at various maturities. Fixed-rate loans provide stability by locking in interest rates for the duration and protecting your company from potential rate increases. Interest rate swaps, on the other hand, allow you to exchange floating-rate payments for fixed-rate payments or vice versa, depending on your risk management objectives and market outlook.

When considering long-term interest rate exposure, it's important to keep in mind that long-term rates are influenced by a range of factors, including the market's expectations for future Fed actions and global economic risks that affect the supply and demand for Treasury bonds, corporate bonds and other debt instruments. Closely monitoring these factors and seeking expert advice can help you make informed decisions about your long-term financing strategies.

Current Interest Rate Environment

Over the past two years, the interest rate environment has been remarkably volatile, driven by aggressive rate hikes by the Federal Reserve, concerns about inflation and various economic and geopolitical risks. The Fed has taken a proactive stance in raising rates to combat rising inflation, which has led to increased borrowing costs for companies across industries.

One notable feature of the current interest rate environment is the inverted yield curve, where short-term rates have been higher than long-term rates for more than a year. This unusual situation presents both challenges and opportunities for companies trying to manage upcoming debt maturities. An inverted yield curve can signal economic uncertainty and potential recessionary pressures, as it suggests that investors expect future economic growth to slow down, leading to lower interest rates in the long run.

In this context, companies must carefully assess their financing needs and consider various strategies to optimize their debt structure. This may involve a mix of short-term and long-term financing, as well as the use of hedging instruments to manage interest rate risk. Working closely with experienced financial professionals can help you navigate the complexities of the current interest rate environment and make informed decisions that align with your company's goals and risk tolerance.

At Associated Bank, we understand the challenges companies face in managing interest rate risk in a volatile market. Your dedicated Relationship Manager, alongside a team of product specialists, is committed to helping you navigate this unpredictable interest rate environment with confidence.

Our team will work closely with you to:

1. Identify your level of exposure and material risks: We'll conduct a thorough analysis of your company's financial position, including your debt structure, cash flows and sensitivity to interest rate changes. This will help us pinpoint areas of potential risk and opportunities for optimization.
2. Interpret market signals on the direction of interest rates: Our experts stay up-to-date on the latest economic indicators, market trends and policy developments that can impact interest rates. We'll provide you with valuable insights and guidance to help you make informed decisions about your financing strategies.
3. Propose solutions that take advantage of the bank's full suite of lending, deposit and interest rate hedging products: Associated Bank offers a comprehensive range of financial solutions designed to meet the unique needs of your company. From fixed-rate loans and interest rate swaps to customized hedging strategies, we'll work with you to develop a tailored approach that aligns with your risk management objectives and financial goals.

To ensure you stay informed about the latest developments and insights, we encourage you to regularly read our interest rate updates. These updates provide timely analysis and commentary on the factors driving interest rate movements, as well as practical guidance on how to adapt your financing strategies in response to changing market conditions.

Managing interest rate risk is a critical component of financial risk management, especially in today's volatile market environment. By understanding your company's exposure to both short-term and long-term interest rates and working closely with the experienced team at Associated Bank, you can make informed decisions that help mitigate risk and position your company for long-term success.

We're here to support you every step of the way, providing the insights, solutions and partnership you need to thrive in any market condition. Contact your Associated Bank Relationship Manager today to discuss how we can help you manage interest rate risk and achieve your financial objectives.