on hedging interest rate risk

Discussion in 'Financial Futures' started by tortoise, Jan 10, 2009.

  1. tortoise


    My father (retired) has a fairly large position in Massachusetts municipal bonds. The bond portfolio has performed nicely in this environment of falling interest rates, but interest rates are at a place where the probabilities favor a rise -- possibly substantial -- in the not-too-distant future. Now comes the question, how can he prudently hedge against this obvious risk? What derivative strategies might make the most sense for someone looking to hedge, rather than to speculate?

  2. The probability is most likely the spread between munis and treasuries will return to more historic norms as the recession goes to later stages and bailout money comes. So short treasuries of matching duration (or long bond puts more appropriately) would be the effective trade.

    Whats the average duration on the portfolio ?
  3. tortoise


    Very helpful, thanks. Portfolio duration is in the 18-20 year range. So long bond puts then?