As per the chart above, 3-year swap rates were trading sideways over June and July until it became evident that the Bank of England would increase the pace of its monetary policy tightening from the standard adjustment of 0.25%. The shift to larger 0.50% & 0.75% adjustments saw 3-year term rates rise from 2.33% at the end of July to 3.96% by mid-September.
The 3-year swap rate then spiked to 5.61% in the days following the mini-budget on the 27th, before the Bank of England successfully intervened to calm UK markets. Rates have been extremely volatile over March, the 3 year swap rate went from 4.15% on March 9th to The 3-year swap rate closed at 4.15% on March 16th, and then fell over 50 basis points in 2 weeks to 3.624%. On a £20m swap, that’s a c.£420k saving. Banks will often cite volatility as a reason to charge higher rates, meaning you may not be getting the true cost saving if you do not have an advisor. On the 4th of April the 3 year swap rate closed at at 3.73%.
Implied volatility, a major component of Cap pricing has also fallen sharply as stability has returned to trading conditions. The combination of a levelling in the SONIA forward curve and a lower risk premium for the UK has resulted in lower hedging costs for borrowers over the past 2 months. The cost per £10m to cap SONIA at 4% for 3 years is now £264k, less than half the £563k per £10m it would have cost to buy a Cap on the 27th of September. Reduced cost and stable trading conditions make this an attractive time to consider hedging interest rate risk on SONIA debt.