Help with interest rate hedge?

G

garbo

Hi everybody --

This is my first post here. I hope I'm in the right place.

I have a question about interest rates (as they relate to futures).

My problem is this: I'm thinking of paying off my current mortgage (30 years, 8.5%) with a home equity line of credit (variable = prime rate = 4.75% currently, over 10 years).

Why not just refinance? My current mortgage is hard to refinance because it is on a NYC co-op that is < 50% owner-occupied and banks are hesitant to lend. But I hate paying that high rate so I'm tempted to find a way out.

My question is this: Is there any way I could hedge myself against a rising prime rate in the futures market? What futures contract corresponds most closely to the prime rate?

I'm imagining maybe I could sell one or more contracts as a hedge and lock myself into this current low rate despite having a variable rate mortgage. Is this a crazy idea?

If anybody could recommend some good books about interest rates, I would appreciate that too. I'm pretty knowledgeable about stocks, futures and options, but interest rates seem impossibly complex.

Thanks in advance!

garbo
 
Originally posted by garbo

My problem is this: I'm thinking of paying off my current mortgage (30 years, 8.5%) with a home equity line of credit (variable = prime rate = 4.75% currently, over 10 years).

Why not just refinance? My current mortgage is hard to refinance because it is on a NYC co-op that is < 50% owner-occupied and banks are hesitant to lend. But I hate paying that high rate so I'm tempted to find a way out.

My question is this: Is there any way I could hedge myself against a rising prime rate in the futures market? What futures contract corresponds most closely to the prime rate?

I'm imagining maybe I could sell one or more contracts as a hedge and lock myself into this current low rate despite having a variable rate mortgage. Is this a crazy idea?
More...

Garbo,

You can get a home equity loan (i.e. 2nd mortgage) but can't refinance the original loan? That doesn't make sense to me, but I'm no real estate expert.

Off the top of my head, I'd say the Eurodollar is your best bet to hedge against the prime rate, but maybe others will have better ideas.

Good luck.
 
You might be right. I guess I'll find out within a couple of weeks whether I can get a loan at all.

What I was talking about is probably a bad (risky) idea for a small fry anyway, but I'm still interested in interest rate futures. There doesn't seem to be a lot of discussion of interest rate products here. Everybody wants to trade NQ and ES.

But it seems like (potentially) we are nearing the top of bond bubble (excluding the possibility of deflation...).

Do you know by chance where one can find the actual day-to-day interest rate that Eurodollar futures are based on? The CME site says that settlement is based on the "British Bankers' Association Interest Settlement Rate", but I'm having trouble locating that data
 
Thanks. I just e-mailed the CME. That BBA site looks promising, but I couldn't wring any relevant data out of it.

I also looked at the 3-month T-bill data. That brings up another question: Is the 3-month T-bill data possibly what I'm looking for?

Eurodollar are defined as "time deposits denominated in U.S. dollars that are deposited in commercial banks outside the U.S", which does not seem exactly the same as a 3-month T-bill, but kinda close.

Money gets wierd when you think about it too hard.
 
Usually the banks change their prime rate only when the Federal Reserve changes the Fed Funds Target rate. You should be able to hedge using Fed Funds Futures.
 
The fed funds futures seems like the most precise way to hedge yourself.

One other option that comes to mind is to short one of the new I Shares Fixed income products. I don't know the ticker for the short term treasury etf (SHY)? TLT is the 20 year Plus bond and LQD is the corporate bond etf. If rates rise, either of these should have a corresponding drop in the value of the bonds.

www.ishares.com
 
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