Interest Rates are Rising: How can the Equipment Finance Industry Prepare?

Yield compression can be a pain point for equipment lessors and financing firms, especially in a rising rate environment.

Rising interest rates can negatively impact returns in a typical warehouse-to-securitization financing structure. Let’s explore those risks and how to mitigate them.

Background

The US entered a rising interest rate environment in March 2022 after two years of short-term rates near 0% and historic lows for long-term rates.

The Fed has overseen 6 rate hikes in as many meetings this year. The questions regarding future hikes remain: how high, how fast, and how long?

The most recent minutes indicate continued hikes into 2023 but there remains a high degree of uncertainty and volatility in the markets.

The yield curve becomes downward sloping (inverted) in the second half of 2023, and this inversion has been present in the curve for much of the last 6 months. There is broad-based market consensus that this a strong recession indicator. Historically, the short end of the yield curve tends to be less volatile than the long end but today we are in a unique moment. Since June, both the 2-year and 10-year USD swap rates have moved by 20+bps, intraday. This figure was significantly less volatile over the same period last year. Given relatively large daily movements, it’s very hard to pick the “right” moment to fix your rate.

Your Warehouse Facility

For many firms, a warehouse is designed to provide flexible liquidity to build origination…

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