Entering Swap and changes in duration

Guys, need some help in clarifying something…

Entering the receive fixed and pay floating swap will reduce the overall duration of the net liabilities… (all in the environment of falling interest rates expected)

I don’t get it…shouldn’t it be vice versa, that the overall duration will increase? I know that this was asked zillion of times, but I coulnd’t find a straightforward explanation.

The key for me on these types of questions is to remember that the floating rate liabilities readjust regularly. So your duration is very brief (the readjustment period). Compared to fixed rate liabilities that don’t readjust and therefore have longer durations. Does this help?

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Such a position will increase the duration of assets (if you consider the swap to be an asset), or reduce the duration of liabilities (if you consider the swap to be a liability). Here, they’re looking at it as a liability.


So if i correctly understood: if i own a bond and pay fixed, and then I enter receive fixed, pay floating swap, i create synthetic floating rate debt. Since floating debt has shorter duration (because of short readjustment periods) than fixed, the overall liability duration is reduced. Am I right on this one?

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Yes, true it is… Thanks for the brief answer S2000!
Edit: and to Greybeard as well :slight_smile:

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Yes you got it :+1:
The fixed rate you receive offsets the fixed rate you pay, and you are left with a synthetic floating rate liability. You’ve converted your fixed liabilities with longer duration to floating liabilities with a shorter duration due to the continuous readjustment factor of floating rate liabilities.

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